Product governance

Since 1 January 2013, statutory requirements have applied with respect to the manufacturing of products by financial firms and the manner in which they distribute products to the appropriate target market ('product governance'). Following the entry into force of MiFID II on 3 January 2018 and IDD on 1 October 2018, these requirements also apply to investment firms and distributors of insurance products. The introduction of the requirements with regard to product governance was prompted by various product incidents and ’mis-selling’ of products. The objective of product governance is to prevent such situations arising in the future.

Product governance is sometimes also referred to as PARP (Product Approval and Review Process).

Financial firms carefully define their product governance arrangements

Financial firms should have adequate procedures and measures in place that ensure that the interests of consumers are taken into account in a balanced manner when manufacturing and / or distributing a financial product. A financial product must demonstrably be the result of the balancing of such interests. Only products that are in the interests of customers and are offered to a well-defined group of customers for whom the product is suitable (the target market) should be manufactured.

The product governance arrangements (the policy) should ensure that:

the target market of the product is well defined;
the operation of the product is assessed in various scenarios;
the product information and, insofar as may reasonably be expected, the distribution of the product are adapted to and consistent with the target market;
the policy and the products are subject to review and, if necessary, appropriate adjustment on a regular basis.

The extent to which the above elements are applied in practice depends on the complexity and impact of a product: the more complex and the greater the impact of the product, the greater the attention to detail should be in manufacturing and / or distributing the product. Various elements of the product development process often do not produce a black and white outcome. It is therefore important that firms should carefully weigh and record their decisions.

Financial firms implement their policy with due care

In order to prevent ‘mis-selling’, firms should effectively implement the adopted policy in practice. It is important in this respect that the considerations, reasoning and choices made are properly documented.

The policy as well as the products are reviewed on a regular basis

Financial firms should review their product development process arrangements on a regular basis. If the review gives cause to do so, they must tighten these arrangements. This may be in response to new laws and regulations that require a change in the product development process, for instance. Problems may also be identified in establishing the target markets and distribution strategies, making it necessary to change the product development process.

The financial products must also be reviewed on a regular basis, and whenever there are grounds to do so. These grounds may ensue from the product itself, or elements of the product, as well as from external circumstances. Possible indicators include changes in the terms and conditions of a product that result in significant changes in the operation of the product (for example, when the insurance cover changes), macroeconomic conditions or an increased number of complaints. The financial firm should take the complexity and risks of the product into account when determining the frequency of the reviews.

Financial products are demonstrably the result of a balanced weighing of interests

Financial firms must be able to demonstrate that their financial products are the result of a balanced weighing of interests. Only products that bring added value to the well-defined target market should be offered. The AFM recommends that firms use the 'CUSU assessment framework' when manufacturing their products (and developing the services around the product). This framework allows firms to test products in terms of Cost Efficiency, Usefulness, Safety and Understandability (CUSU) from a customer perspective. Together, the criteria provide a picture of whether the product delivers added value to the customer.

Scope of product governance requirements

The product governance requirements vary according to the type of financial product and the role of the financial firm. For example, a distinction is made between financial firms that manufacture products or compose products and make them available on the market ('manufacturers') and financial firms that distribute products ('distributors'). In the case of products, a distinction is made between banking products (e.g. loans and savings accounts), insurance products and financial instruments (e.g. securities and derivatives).

In addition to the statutory requirements, there are also guidelines issued by the EBA and ESMA for product governance, as well as 'EIOPA's approach to the supervision of product governance'. The AFM applies the guidelines within the framework of its supervision.

Requirements for manufacturers

Statutory and other requirements	Financial instruments	Insurance products	Banking products	*Investment objects, units in alternative investments for retail and premium pension claims**
Article 32 BGfo	X	X	X	X
Article 32a BGfo	X**
Article 32aa BGfo			X
Article 32c BGfo
Article 32e BGfo		X
Delegated Regulation (EU) 2017/2358 implementing IDD		X
EIOPA’s approach to the supervision of POG		X
ESMA Guidelines	X***
EBA Guidelines			X

*Providers of investment objects are exempt if they satisfy the criteria set out in Article 2(1)(a) of the Exemption Regulations under the Financial Supervision Act (Vrijstellingsregeling Wft).
** This article only applies to investment firms that manufacture financial instruments.
*** These Guidelines only apply to investment firms that manufacture and/or distribute financial instruments.

Requirements for distributors

Requirements for distributors

Statutory and other requirements	Financial instruments	Insurance products	Banking products
Article 32 BGfo			X
Article 32a BGfo	X
Article 32aa BGfo	X
Article 32c BGfo
Article 32e BGfo		X
Delegated Regulation (EU) 2017/2358 implementing IDD		X
EIOPA’s approach to the supervision of POG		X
ESMA Guidelines	X***
EBA Guidelines			X

Financial instruments