Recently, it was even formally enforced by the AFM. The regulator imposed a fine of more than €500,000 for insufficient compliance with product governance rules. The company in question had insufficiently defined the target group for one of its pension products, which meant that the product could end up with consumers for whom it was not suitable.
In short, it is very important that firms get product governance right and comply with it. However, this is easier said than done. In this article, we highlight some areas for improvement and pitfalls in product governance that are often overlooked in practice.
1. Determining the target group
Almost every company has formulated the ‘positive target audience’ for each product. However, this description is not always linked to the specific characteristics of the product. Why exactly is the product suitable for this target group? In addition, the target group is not always specific enough. Especially for more complex products, the description needs to be more detailed. The characteristics of the target group, such as their financial situation and risk appetite, should be explicitly mentioned.
In addition, companies sometimes forget to include a negative target group (the group for whom the product is not suitable). Note that you cannot simply claim that the negative target group follows implicitly from the formulation of the positive target group. In fact, there may be a ‘grey area’ between the negative and positive target groups, which includes people who are not necessarily in the target group, but for whom the product is not directly unsuitable.
2. Distribution via execution-only
In terms of distribution strategy, we want to pay particular attention to execution-only sales. We have noticed that with execution-only it is quickly assumed that the responsibility for purchasing a product lies with the customer. This is not entirely true. A company offering an execution-only product is responsible for building safeguards into the sales process to ensure that the product reaches customers within the intended target group.
3. Conflicts of interest
In some cases, the developer and the distributor of a product are related. In fact, sometimes the developer and the distributor are the same party. In this case, it is important that the risks of (the appearance of) conflicts of interest are described and appropriately (visibly) mitigated. One element where the risk of a conflict of interest may arise is, for example, the remuneration for a product.
First, we find that companies do not always identify in advance the information they need for their product review. We advise companies to do this so that information can be requested from relevant parties in a targeted manner.
We also see that communication between developers and distributors is not always documented. In our view, it is a waste to comply with the obligation to share information but not be able to demonstrate this to the regulator.
5. Documentation
We find that while companies often record the results of their product reviews, they do not always adequately document the underlying process. What criteria was the review based on? What information was used to reach the conclusion? Who played what role in the review? You can implement your product governance policy to perfection, but you also need to be able to demonstrate this to the regulator with an accessible product (review) file.
Finally, we advise you to store information about the process you have implemented as centrally as possible. Often, relevant information is scattered across several documents, making it difficult to search and lacking in coherence.
Conclusion
It is understandable that companies (unwittingly or otherwise) fall into the above pitfalls and need to address these areas for improvement. The rules governing product governance are complex and spread across multiple legal sources. These rules may be applied proportionately. This can make it difficult to assess whether you are doing it ‘well enough’. How thorough should the target audience description of a product be? How detailed should you document the process and conclusions of a product review? What is common in the market?
At Projective Group, we regularly advise institutions on all kinds of product governance issues. As a result, we know better than anyone what institutions face in practice and what the best practices are. Amongst other things, this is how we can help you:
- Our free e-paper: “Product Approval & Review Process – Balancing Customer Interest, Risk and Return“, in which we explain the regulatory requirements, outline their practical implications and provide advice on how to effectively implement the policy and process;
- Conducting a PARP Quick Scan or comprehensive review of the product distribution/development policy and the detail and demonstrability of its implementation;
- Advising on the practical implementation of PARP obligations so that they are both appropriate for your institution and efficient.
