In August 2021, the Financial Conduct Authority (FCA) published its review into product governance within the general insurance sector. This follows on from a similar review of MiFID II product governance rules and heralds an increased focus on it across the wider industry.
Looking at these reviews can help you improve regulatory compliance, increase the quality of your financial products, and support good customer outcomes.
In July 2007, product governance standards were first introduced as a regulatory guide entitled ‘The Responsibilities of Product Providers and Distributors for the Fair Treatment of Customers’ (RPPD).
Applying to all regulated firms involved in the supply of financial products or services to retail customers, it was added to the FCA handbook, and was subject to additional non-handbook guidance in 2012 and 2015 , when the design and distribution of structured products came under the spotlight.
Building on the above, the Markets in Financial Instruments Directive (MiFID II) and the Insurance Distribution Directive (IDD) strengthened the approach and paved the way for the Product Intervention and Product Governance Sourcebook (PROD).
The latter introduced more formal, rules-based requirements on design, delivery, and monitoring of all products and their distribution channels, to protect customer interests at all times.
The recent FCA reviews assessed how firms have embedded these regulations into their wider governance processes, and the extent to which they promote good customer outcomes. This aligns with the FCA’s 2021/22 business priority to deliver fair value in a digital age, and the proposed new ‘consumer duty’ messaging of ‘getting it right in the first place’. The new duty will also require that firms design all products and services to meet consumer needs and distribute them accordingly. Good product governance and value for money are integral to these goals.
In its comments on the review the FCA hasn’t pulled its punches. Executive Director Sheldon Mills said:
“Where firms are not consistently meeting existing requirements and expectations, it risks harm through poor value products or products being sold to the wrong customers. These firms have significant work to do urgently to be able to comply with the enhanced product governance rules. Firms that fail to do that work risk regulatory action".
Perhaps of more concern for businesses, the recent insurance review also noted that “too many firms are not fully meeting the FCA’s expected standards”. For insurance firms, this perceived regulatory gap could also make it particularly challenging to embed the new pricing practices rules, which aim to tackle the loyalty penalty and provide fair value to customers, effective from 1 October 2021. Value for money and pricing should be embedded at each stage of a product's design, delivery, and eventual monitoring. This is not a one-and-done exercise.
However, it’s important to note that insurance firms aren’t the only ones under scrutiny and similar compliance issues may exist across the wider financial sector. There may be more thematic reviews in the months ahead, potentially looking at areas that have previously not received close scrutiny but where product issues may exist. Lifetime mortgages are a good example of this. Taking appropriate steps now can reduce compliance risks, help demonstrate compliance, and promote the fair treatment of customers.
It’s tempting to think of terms such as ‘product governance’ and ‘fair value’ as regulatory buzzwords. However, it’s essential to go back to basics to consider the needs of each customer segment, and the risk of customer harm due to poor value products. Firms that do not comply, or who are not treating customers fairly, may face regulatory intervention, sanctions, and reputational damage.
Understanding the product lifecycle will help firms establish an appropriate governance framework. A gap analysis can identify any weaknesses. To meet the FCA’s requirements and principles and mitigate long term compliance risks, businesses need to look at five key areas.
Many firms may benefit from moving product governance processes and lifecycle monitoring to a regtech (regulatory technology) solution, which can streamline activities and reduce costs. They can also improve risk management by integrating product governance controls into a wider range of regulatory frameworks, embedding it across the entire business. This approach can also make it easier to document compliance and demonstrate the firm’s commitment to good customer outcomes, which will be critical under the consumer duty proposals.
Poor customer outcomes are generally caused by badly designed products, sub-par delivery and a weak monitoring framework. To treat customers fairly, firms must uphold product governance rules and evidence all regulatory expectations – after all, if you haven’t written it down, how can you prove it happened? However, it's often easier said than done and the potential new consumer duty rules may introduce further complexity.
Staying on top of regulatory change, including all thematic reviews, feedback, and industry interpretation, will ultimately help firms to continue to deliver fair value and outcomes to customers. This is certainly another area where regtech compliance solutions can help to smooth the path for compliance departments.
