Product Governance in the Era of Regulatory Change

Global regulatory change is requiring product governance frameworks to continually adapt and try to be the ‘glue’ the brings the increasing requirements into one place. Whether it is the updated ESMA MIFID II product governance guidelines, the FCA’s Consumer Duty and Assessment of Value in the UK or multiple ESG-related regulations and frameworks such as TCFD, SFDR or the SEC Climate reporting requirements, they all require a comprehensive product governance framework to bring the requirements together and assess funds and products holistically.

This regulatory evolution, with a pronounced focus on consumer outcomes, has necessitated a rapid enhancement of governance processes and a substantial broadening of product teams’ roles and responsibilities.

We have observed the following key challenges through our recent engagements with various asset managers:

Moving from implementation to innovation

• Phase 1: Compliance Implementation

Initially, firms tend to focus on meeting immediate compliance deadlines, sometimes requiring a ‘minimum viable product’ approach. While necessary, this can result in a siloed and short-term mindset. In our view, it is important for firms not to stop once the implementation deadline is reached, as the efficiency and cost savings from enhancing processes from Day 2 onwards can prevent further pain down the line.

• Phase 2: Process Optimisation

Moving beyond mere compliance, this phase emphasizes streamlining processes, enhancing efficiency through automation, and clearly defining roles and responsibilities. This shift aims at a more effective and sustainable compliance process.

• Phase 3: Innovation and Insight Extraction

The final phase involves leveraging processes initiated through regulatory change as a source of insights for product and service innovation. For instance, processes such as the assessment of value should be embedded across product thinking, including product strategy and new product development.

To embark on this transformative journey, it is imperative that asset managers invest in their Product Functions and empower them with operating model to succeed. Potential considerations include:

• Process Efficiency: Ensuring all processes and controls are consistently documented and consider internal workflows and communications tools to link multiple teams and enhance efficiency and risk management
• Automation Investment: Organisation-wide commitment to driving efficiency and investing in automation must cover product needs to reduce the time spent moving data between sources and into manual reporting
• Functional Structure: Reorganize the product function to make sure teams are able to efficiently execute product strategy and product development while maintaining sufficient regulatory reporting
• KPIs and Regulatory Alignment: Having KPIs and KRIs with clearly defined triggers and limits which drive actions when crossed and serve both business and regulatory reporting requirements
• Foundational Data Management: Moving to a single firm-wide product master that comprehensively houses both fund and mandate data; and is part of the enterprise data strategy ensuring robust and clear data ownership, management, and connectivity

Leading managers are seeing the Product function becoming a bridge between Investment and Client Platforms and other enterprise requirements. In our view, Product should be seen as a distinct platform within the broader architecture. Gone are the days of product ‘begging, borrowing and stealing’ technology from the rest of the business!

The ‘Product Platform’ is a combination of fit-for-purpose technology architecture, data strategy / management, processes, and controls. The right integrations, both within Product and across functions are key.

Regulatory change such as those experienced recently in the UK with Consumer Duty can serve as catalysts for managers and distributors to become more efficient, reduce costs and align strategic objectives with new requirements. The initial costs of adapting to these regulations underscore the value of embracing continuous improvement through strategic optimization, automation, and innovation. As companies undertake these improvements, they unlock several key advantages:

• The ability to expedite the process of introducing products to the market, thereby staying competitive and capitalizing on early-mover advantages.
• Access to consistent, complete, and accurate data, which enhances decision-making capabilities, for example, across product range management, new product development, sales, and corporate strategy
• A deeper understanding of the sources of risk, enabling more cost-effective and efficient risk mitigation strategies.