The notion behind product governance stems from the fact that investment firms which manufacture and distribute financial instruments known as products, shall act in the best interests of their investors at all stages of a product’s development and distribution life-cycle.
Thus, product governance refers to the systems and controls that firms must have in place to design, approve, market and manage products through their lifecycle to ensure that they meet the necessary legal and regulatory requirements.
Good product governance should result in products that:
- Meet the needs of one or more identifiable target markets;
- Are sold to clients in the target markets by appropriate distribution channels; and
- Deliver appropriate consumer outcomes.
In this respect, directive 2014/65/EU on markets in financial instruments (“MiFID II”) has introduced several product governance requirements ensuring that firms which manufacture and distribute financial instruments act in the best interests of their clients.
Specifically, MiFID II has introduced the following requirements on product governance:
- Conditions to be adopted by firms manufacturing products; and
- Requirements to be adopted by firms when deciding the range of products and services they intend to offer their clients.
Therefore, product governance can be described as the systems and rules which strengthen the level of investor protection and reinforce the confidence in the European financial markets. The main aim behind the principle of product governance is that the best interests of the clients is sought throughout the entire life cycle of the products and services.
Furthermore, product governance rules ensure that distributors also understand the features of the investment products they intend to offer or recommend. Thus, by using the information obtained from manufacturers and the information on their own clients, the distributors determine the target market of clients to whom the products and services are to be offered.
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