Product Governance

A firm first identifies a target market, meaning the customers the product is meant for and those it should not be sold to. It then tests the product's features, costs and risks against that group, approves it through a committee, and sets how it will be distributed and who may sell it. After launch, it monitors sales, complaints and outcomes, and reviews the product at set intervals or when problems arise. Manufacturers share target market information with distributors, who must check that they sell only to suitable customers. The EU's MiFID II and Insurance Distribution Directive contain formal product oversight rules, and similar duties exist in Australia and elsewhere. Regulators can ban or restrict products. Examiners looking at a failed product tend to ask for the target market definition and committee minutes before they look at any individual sale.

A private wealth firm plans to launch a high-yield structured note. Its product committee defines the target market as experienced investors with a high risk tolerance and a five-year horizon. Retail customers with short horizons are excluded. The committee agrees training for sellers, a sales-quality check and a six-month review. When the first review shows several sales to excluded customers, the product is paused.