The Lexford Notebook: Financial product governance. Navigating the challenges.
Product governance is a central component of a financial product manufacturer’s (e.g insurer, bank, retail investment firm) enterprise wide risk management. Essentially it is a process to ensure customers are not suffering detriment from purchasing a financial product, are receiving a product that meets their needs and that they receive value for money.
It can also be viewed much more compellingly, as the mechanism by which a firm can move towards its customer vision, proactively enhancing the customer value proposition, identifying any concerning trends to provide issue prevention and creating the virtuous circle of customer advocacy rarely achieved in financial services.
Product governance is a regulated process with rules which have evolved significantly in recent years as MiFID II and the Insurance Distribution Direction (“IDD”) have been implemented in the UK under the Product Intervention and Product Governance Sourcebook or “PROD” rules for short.
The precursor to PROD was the “Responsibilities of Product Providers and Distributors for the Fair Treatment of Customers” or RPPD for short. The RPPD still applies to those firms not covered under the PROD rules, such as mortgage firms and consumer credit firms.
PROD takes its cue from both MiFID II and IDD, with rules for the former being aimed at investment firms (under PROD Chapter 3) and the latter at insurance firms (PROD Chapter 4), reflecting a slightly watered-down version of its MiFID equivalent in terms of its requirements. Both chapters also include rules for distributors of financial products.
The product governance rules seek to ensure financial product manufacturers are focused on the outcomes customers receive as a result of their purchase of a financial product, rather that offering a prescriptive set of rules (although there are a number to follow).
This focus on outcomes makes intuitive sense, as focusing on a process and not what the customer is actually experiencing is clearly not right. However, what this does then create is a need for financial product manufacturers to give some serious consideration to the outcomes they want for their customers and the process to ensure these are delivered.
Areas that financial product manufacturers often find require particular consideration include:
How do I measure whether a customer will receive value for money from the product they purchase and whether this changes over the product’s lifetime?
What criteria should I use to define the product’s customer target market and how do I measure whether sales are being made to this market if utilising third party intermediated distribution?
How do I develop effective governance frameworks across the product lifecycle and ensure they are being implemented consistently, with appropriately skilled input and effective second line challenge?
How can I detect any emerging product related issues and look to prevent poor customer outcomes rather than react once they’ve happened?
With sometimes a portfolio of hundreds of products (both closed and open to new customers), how do I manage the overall process, allocate resource effectively and implement required actions?
These are questions that financial product manufacturers must tackle head on and where rules aren’t prescriptive, they must set out clearly their methodology and rationale to the governance approach they take.
Product Governance is an area of focus for the FCA and one that is going to continue getting a lot of attention over the coming months. This makes sense, particularly when considering some of the high profile cases where arguably an effective product governance process should have identified and prevented the issues occurring.
Examples include, a retail fund with no lock-in with a high exposure to illiquid assets leading to difficulties when customer redemptions require liquidity. An actively managed fund moving to a passive strategy, but not reflecting this strategy change in more appropriate fee levels. PPI sales being targeted at people who would receive no or little benefit from the product.
In response financial product manufacturers should be clear not only on their obligations, but also on the outcomes they want to deliver for their customers and the process to achieve them. Product governance is a major part of a firm’s enterprise wide risk management framework and one of the most important ways it is implemented in practice.
Getting product governance wrong and ending up with customer complaints or even negative press coverage, can be highly damaging to a brand. Getting governance right and ending up with positive customer advocacy, can be transformational.
Approach for financial product manufacturers:
Develop a clear understanding of the regulatory obligations and ensure the process and methodology to address is set out clearly and is appropriately approved internally.
Consider more broadly than regulatory requirements what outcomes you envisage for your customers and how the governance process can support you achieving these.
Ensure consistency between your product governance framework(s) and your approach to customer outcomes under enterprise wide risk management strategy.
Taking action as a result of the process findings is what ultimately counts, not just having a good process in place.
Lexford provides specialist advisory and solutions to financial services firms, with a particular focus on the insurance sector. Our Product Governance solutions include:
Our free product governance self-assessment framework for financial product manufacturers.
A full suite of product lifecycle governance frameworks (new product approval, product risk assessment, product governance review, product closure and value for money),
Consultancy support to enhance your product governance approach.
We are also developing a digital product governance platform, Product GovX, to empower the governance process.
Contact firstname.lastname@example.org for further information.