Grow your business whilst maintaining control

Transcription

1 Grow your business whilst maintaining control Product governance July 2017

2 Introducing product governance... Effective product governance is vital for firms seeking to drive and manage innovation whilst delivering good customer outcomes and meeting regulatory expectations. Indeed the new FCA business plan identifies Firm s culture and governance and Promoting innovation as two of their six cross-sector priorities. Good governance confirms that the right inputs are considered and, where challenges are raised, they are appropriately addressed, reducing the risk of regulator intervention. Innovation, alongside good governance, also plays a key role in helping firms to keep pace with digitalisation and continue the generation of sustainable profits going forward. In light of these challenges, there has never been a more topical time to reassess your internal governance procedures, and this document considers some of the main challenges presented by emerging market trends.

3 Good product governance is key to getting the balance right. Comply with regulation Desire to innovate Financial services is changing and changing rapidly. After many years of relatively low levels of innovation, digital disruption is increasingly evident across all types of retail products. From mobile banking to robotic advice, the onset of digitalisation is driving rapid innovation that is leading to the emergence of new firms, new products and new methods of distribution. Against this background, existing firms are being forced to respond. They are asking themselves whether digital is simply a different distribution channel or whether it is something more fundamental. This is particularly pertinent as challengers and alternative digital-first companies often present a simple alternative offer to their customers. At the same time, consumers are becoming smarter when it comes to their finances with higher expectations and increased opportunities to shop around. These changing consumer needs and wants, and a consequent focus on products providing simplicity and value for money, are adding to the pervading sense of change. This is all taking place in the face of a regulatory environment that has become more prescriptive, more intrusive and more muscular. Regulators are ever more focused on ensuring that consumer needs are met in a fair and transparent manner. Faced with these trends, there is crucial need for firms to ensure that their products are fit for purpose throughout both product and customer life cycles. Done right, product governance can offer a robust framework to respond to this challenge. We make judgements on whether consumers would be better off protected from particular products or market developments. These protections may include restricting firms ability to market complex products to retail customers or through directly intervening in the market, such as capping the price of high-cost short-term credit (FCA, Our Mission 2017, Page 7) Grow your business while 3 maintaining control

4 W W Why should we do it? hy is good gov ernance imp ortant? Good governance should be seen as a key enabler of appropriate and customer-centric innovation. It will allow firms to design and launch products in a way that minimises regulatory and conduct risks. Firms will also be able to promptly identify instances where products are not performing or being distributed in alignment with its plans, and take prompt remedial measures, including exit and, where necessary, remediation. The outputs from a strong governance framework can provide the following benefits to businesses: More appealing products for the defined target market Easier route to market through building in risk and compliance considerations from day one Reduced likelihood of future incidents or rectifications by mitigating risks and taking account of lessons learned Early identification of any potential and emerging conduct risks A clearly defined exit strategy hat are the regulatory p ressures? The FCA Business Plan 2017/18 clearly sets out the regulator s expectations of firms explaining that We expect firms to have effective governance arrangements in place to identify the risks they run with a strategy to manage and mitigate those risks to deliver appropriate outcomes to consumers and markets. The Business Plan also reiterates the importance the FCA attach to facilitating innovation. They have a project dedicated to innovation (Project Innovate) and have recently launched the regulatory sandbox where new, innovative products can be deployed and tested with reduced barriers to entry. This demonstrates that they see innovation as a key part of their journey in promoting an honest, fair and effective market. More direct regulatory pressure is also emerging for individual retail product areas. On 3 January 2017, the EBA guidelines on product oversight and governance became enforceable. The guidelines outline the minimum requirements in respect of product governance that firms must adhere to. For the insurance industry, the Insurance Distribution Directive (IDD) came into force on 18 February This makes it a regulatory requirement for all insurance undertakings and intermediaries that manufacture any insurance product for sale to customers to maintain, operate and review a process for the approval of each insurance product or significant adaptions of an existing insurance product before it is marketed or distributed to customers. EIOPA have also produced supporting guidelines that highlights the importance that firms get product governance right. Asset managers will also be required to adhere to much stricter regulation on product design, governance and review when new Markets in Financial Instruments Directive (MiFID II) becomes enforceable from January 2018 onward.

5 Getting it right D esigning ef f ectiv e controls Firms should ensure that a strong governance framework and product plan sits around new product development, implementation and the ongoing governance of new and existing products. The result of this is that products are produced and sold in line with the firm s business plans, and are therefore aligned to the wider corporate strategy and so, ultimately to the customer-oriented goals of the wider firm. At a minimum, a strong framework should include the following overarching considerations: Identifying an appropriate target market for products Putting the customer at the heart of decisioning and customer focus groups Giving early consideration to regulatory and operational risks Ensuring that there is a well designed product approval process for new and changed products Monitoring a product s progress in line with identified and emerging risks. Governance needs to be timely and reflective of the speed of digital innovation Agreeing an exit strategy up front K ey challenges of good gov ernance Throughout these stages, there are a number of considerations that it will be important to consider: Do you have the right levels of governance (e.g. committees), and are the right people represented? Do you have the right levels of oversight and testing in place, and are all lines of defense correctly involved? What Management Information (MI) will you gather before and after launch, how will you gather it, who will be the internal recipients of this data and how will it be assessed? What level and frequency of ongoing review is appropriate and what trigger events would evoke a change approach? Are you able to demonstrate proactive review and challenge, actions and owners? Grow your business while maintaining control 5

6 Designing a framework Firms strategy The first step is defining the firm s strategy. This will require input from senior leadership and engagement with the board. It is critical for ensuring that products are designed with the strategy in mind from the offset. Target market Defined target market for each product is crucial. One of the most common reasons for failure with product design is failure to aptly define the target market and therefore the requirements of the product to meet those needs. Product design The product design process, including the use of customer focus groups is pivotal to the success of any new product. The critical component for product design is the governance that surrounds it. Firms should seek input from all relevant areas of the business during development. This will help to ensure the product meets regulatory requirements, customer needs, is aligned to the firm s strategy and helps to foster innovation. Risk rating and sign off A rigorous risk assessment process for all new products must be in place, with documented policies and procedures that support it. The assessment should align to the firm s strategy and strategic risk appetite. The output from the risk assessment will drive the level of further review required. Once the product has undergone the risk assessment, it is the responsibility of senior leadership to challenge the product, its potential risks and any mitigating processes.

7 The framework below articulates all of the key steps of the product development process, ongoing monitoring throughout the product lifetime and eventual exit strategy. Firms should have the relevant processes and controls in place to complete the below prior to launching new products. 5 P ost I mp lementation rev iew A centralised, tracking process that monitors all commitments for new products and ensures that they are working as intended is a necessity. This will help to ensure that the firm fulfils any promises made when the product was sold. 6 C ontinous monitoring A continuous review process is essential to help ensure that the product continues to meet customer needs and aligns with the firm s strategy. This should include a risk-based ongoing product review cycle including the use of appropriate MI and should also be a factor in any product optimisation and back book rationalisation activity. 7 E x it strategy A robust exit strategy should also be developed for all products as part of the product design process. This exit strategy should be signed off by all key stakeholders and be in line with the firm s strategy and values. The exit strategy is critical for either maximising the benefits of selling the product or minimising the losses. It should cover a variety of different reasons for exiting the product (e.g., reputational, regulatory or financial) and be easily implemented. Grow your business while maintaining control 7

8 I How EY can help We can work with you to help address the challenges associated with good governance, while at the same time complying with regulatory legislation. We have experience in helping our clients transform their governance structure to help them meet regulatory requirements, increase speed to market, meet their business plan targets and develop products that epitomise their values. We work with our clients to help them achieve this by: 1 2 A D esigning ef f ectiv e gov ernance f ramework s It is important to design and execute bespoke governance structures that will support successful product design and innovation within the context of the SMR regime. We appreciate the complexities around designing a new product and can help you coordinate staff from across your business to bring the right skills and knowledge to support the delivery of your strategy. d ap ting to a d igital env ironment The new digital environment places a new set of demands on firms, with the need to be faster paced and to take action more immediately than ever before. We can help you design new models and customer journeys that will allow you to adapt to this new environment and address your risks as soon as they emerge. B uild ing a suite of insightf ul M MI can help identify, measure, monitor and reduce the crystallization of the key risks identified across the product life cycle. Drawing on our experience with data management, and increasingly with Big Data, we can help you design and roll out MI that supports your product governance framework, and allows those responsible to address issues as they evolve. R ed ucing cond uct risk s Good governance structures traditionally allow for the early identification of conduct risks. These conduct risks could be isolated issues. However, they could also be widespread, systemic issues. We have dedicated conduct risk teams available across all main product areas and can provide advice on mitigating conduct risks and, if required, remediate any issues identified. E nsuring comp liance Getting your regulatory compliance right is a key part of any strategy. We can help you to comply with the range of new and existing regulatory expectations in this area. Our Global Regulatory Network (GRN) and market-leading experience in assessing and executing new regulations means we are perfectly suited to work with you to help confirm that all regulatory requirements are met. D ev elop ing technical training and learning In order to support a sustainable product governance framework, it will be necessary to ensure that your organisation s staff have the right knowledge and capability to design, manage and sell your products. We can help develop training or independently review existing training and sales procedure against regulatory standards.

9 Conclusion Firms must continue to innovate and develop new products that meet the developing needs of customers. Not doing so presents a very real risk of falling behind as the world changes rapidly around them. However, genuinely successful innovation will always entail a degree of risk that can never be fully reduced, and so it is vital that product development and governance is set up in a way that helps identify and manage this risk in line with both internal appetite and external expectations. Product governance should be carefully designed such that you develop innovative and useful products that reach the right target market, through the right distribution channels, and then perform in line with expectations. If you do this then you will meet the needs of your customers whilst growing your revenues and building profitability. With our help, we believe that this can be achieved. For further information, please contact: John Liver UK Partner, Financial Services Risk Ernst & Young LLP jliver@uk.ey.com Heather Alleyne Executive Director, Financial Services Risk Ernst & Young LLP halleyne@uk.ey.com Jenny Clayton UK Partner, Financial Services Risk Ernst & Young LLP jclayton2@uk.ey.com Simon Turner Partner, Financial Services Risk Ernst & Young LLP sturner@uk.ey.com Steve Southall Executive Director, Financial Services Risk Ernst & Young LLP ssouthall@uk.ey.com Grow your business while maintaining control 9

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