Product governance frameworks: Building the foundation for regulatory confidence
Product governance sits at the heart of the Consumer Duty agenda. The FCA's PROD rules and Product and Service principles, require in-scope firms to design, distribute and review products and services in a way that delivers good outcomes for consumers in defined target markets. That obligation does not diminish once a framework is in place and demands ongoing and substantive oversight – something many firms have struggled with, particularly where distribution chains become a bit more complex.
However, good governance shouldn't be complicated. The principles underpinning product governance frameworks — know your target market, demonstrate fair value, review your products, act on what you find — are not new, and this blog does not claim to break new ground. The fact that the FCA is still making the same observations, and that firms are still falling short on the same fundamentals, is itself the point. If the basics were being done well, the regulator would not keep repeating them.
For insurance firms and wealth and asset managers, the product governance rules have been in place since 2018 and, in principle, should be well established and embedded. Yet the FCA's continued focus on these sectors suggests that for many firms, implementation did not keep pace with the regulator's evolving expectations. The introduction of Consumer Duty in 2023 raised the bar materially, and firms that assumed their existing arrangements would pass muster under the new standard have found otherwise.
For firms in other sectors, including banking, consumer finance, payments and other retail financial services, product governance and fair value requirements under PRIN and Consumer Duty have been in place since 2023. The FCA's focus on fair value in cash savings, including its intervention on easy access savings accounts with low introductory rates, is an early signal of where scrutiny is heading. The pattern is consistent: the FCA observes the market, identifies where consumer outcomes are falling short, and then acts. For firms that have treated 2023 implementation as a one-time exercise rather than an ongoing standard, now is the time to revisit this.
Given the magnitude of the Duty, we know many firms put in place product governance frameworks at pace to align with the rules. However, now the dust has settled, and firms are a little clearer on FCA expectations, firms are revisiting the frameworks in place to make sure they stand up to scrutiny and are operating as intended. For insurance firms, there is an additional dimension in that there is ongoing work by the FCA to simplify certain PROD 4 requirements in recognition of the overlap in some areas with Consumer Duty. Therefore, for these sectors, frameworks may need to be restructured, not just reviewed, once the final rules are confirmed. For firms in other sectors, the priority is more straightforward in asking whether what was built in 2023 actually works and delivers some value to the firm and good outcomes to customers in practice.
What the FCA is seeing in the market
The FCA has been open in regard to what they’re seeing in the market. In its thematic work, supervisory engagement, and in the most serious cases, skilled person reviews under section 166 of the Financial Services and Markets Act, it has identified both good practice and areas of persistent concern. Where shortfalls have been found, firms have been required to implement remediation plans addressing not just the design of their frameworks but the outputs those frameworks are, or are not, delivering.
Within these reviews, the FCA has called out several shortcomings. For example, the regulator has found that target market assessments were too vague, too broadly defined, and did not adequately consider whether there were groups of customers for whom the product would not provide the intended level of value. Fair value assessments have in some cases been little more than internal cost exercises, without adequate consideration of consumer benefit or the value added (or eroded) across the distribution chain. Similarly, review processes have been found to be tick-box exercises and not linked to genuine outcomes data, and in a number of cases, governance has existed on paper but lacked the independence, challenge and escalation culture that makes it real.
However, they have also referred to better examples. Regarding target markets, this includes being specific about the characteristics of the target market, their objectives, needs and interests, and any customers for whom the product would not provide the intended value. For example, this includes reference to specific age restrictions and specific number of motoring convictions or claims, rather than generic language such as “a low number”. In addition, credible fair value methodologies typically included a formal process for senior managers to receive appropriate levels of information, as well as ensuring genuine feedback loops between distribution data and product decisions. In particular, where senior management are actively sighted on governance outcomes, rather than simply signing off committee minutes, the FCA has taken note.
The direction of travel
For sectors newer to product governance, the window to get ahead of regulatory scrutiny is open, but it will not stay open indefinitely. Firms that use this period to stress-test their frameworks, rather than waiting for a supervisory request, are in a materially stronger position. The firms that struggle tend to be those that implemented frameworks reactively in 2023 and have not revisited them since.
The insurance sector, which has navigated PROD alongside GIPP, Consumer Duty and more recently GI insurance simplification rules, offers a useful reference point. Our work in the market as firm side-support to those under scrutiny, as well as Skilled Persons on behalf of the regulator, has shown us that regulatory scrutiny on product governance has intensified.
The lesson is that good governance is iterative and therefore requires investment, genuine challenge, and people who understand the regulatory expectation well enough to exercise meaningful judgement.
Getting the foundations right
Whether you are a firm that implemented PROD in 2018 and is due a serious health-check, or one that came into scope more recently under the Consumer Duty and wants confidence that your framework will withstand scrutiny, the fundamentals are the same. Frameworks need to be coherent, integrated, and alive rather than static artefacts produced for a regulatory deadline.
Our team works with firms across sectors to design and uplift product governance frameworks, conduct independent health-checks of existing arrangements, and support fair value and target market assessment processes. Over the coming weeks we will be publishing snippets on what we are seeing and hearing from the market and regulators on this important topic, so keep your eyes peeled! In the meantime, if you would like to discuss your current framework with our subject matter experts, or are preparing for increased regulatory scrutiny, we would be happy to have that conversation.