Why robust product governance is key to Consumer Duty compliance
The new Consumer Duty policy from the UK Financial Conduct Authority (FCA) is set to bring in substantial changes to the way financial firms manage product governance. The window for compliance is short – the final policy is expected to be published in July 2022, and the implementation deadline will be in April 2023.
The regulator believes these changes in product governance are needed to improve consumer outcomes in the UK. For example, recently the FCA looked at asset managers’ compliance with Markets in Financial Instruments II (MiFID II) product governance rules and found substantial issues across product design, product testing, engagement with distributors, governance and oversight, including record-keeping. The FCA concluded that “there is significant scope for asset managers to improve their product governance arrangements.”
What new product governance processes will we require?
The new Consumer Duty regime will bring in considerably increased accountability for product governance within firms. While many financial services firms may already have product governance programmes in place, these are usually manual and use email, spreadsheets, and shared drives to host documents. This type of programme is usually not auditable, so it will be very challenging to prove to the regulator that the Consumer Duty principles have been adhered to by producing evidence.
In addition, the FCA is making the Consumer Duty personal. The regulator is planning to amend the Senior Managers & Certification Regime (SMCR) individual conduct rules – all employees who are within the scope of the FCA’s Conduct Rules will be required to “act to deliver good outcomes for retail customers.” In addition, the regulator is also implementing the Consumer Duty’s cross-cutting rules within SMCR.19. Conduct rules staff will be required to:
- act in good faith towards retail customers
- avoid foreseeable harm to retail customers
- enable and support retail customers to pursue their financial objectives.
These changes – and others – mean that financial services firms are going to need to rethink their strategic approach to product governance.
How will existing product governance processes need to be improved?
There is already a substantial volume of rules and guidance on product governance available from the FCA and other bodies – such as the MiFID II requirements. Firms will need to ensure they are able to evidence compliance with these.
In addition, under the Consumer Duty policy, the FCA would like to see firms substantially improve their:
- Products and services
- Customer service
- Price and value
Again, firms will need to show the changes they are making, and be able to evidence processes, documents, and actions to the FCA going forward.
How do we ensure a consistent, joined-up approach across our entire organisation?
The need to evidence product government requirements to regulators means that stakeholders in the organisation will also need product governance information and data. At a minimum, the board and senior management will want to track product governance compliance more closely. Conduct rules staff under SMCR will also want to be sure they are meeting their obligations.
So, a strategic approach to product governance is needed that can capture data, manage processes, and provide automated reporting. Kore’s Product Relationship Management as-a-service platform is a single location for product governance documents, processes, and data in the cloud – enabling firms to provide evidence, view dashboards and generate reports at the click of a button. By moving from manual methods to a technology-based approach, financial firms are able to implement a consistent, joined-up approach across the entire organisation. This help to ensure compliance – and also support a more efficient and holistic approach to product governance, which can deliver real value for organisations.