Product Governance And Disclosure Requirements

Question 1

Briefly explain what product governance means

Answer 1

1. Defined as the creation and management of products through their life cycle.
2. The FCA set out various product governance rules in the FCA handbook’s PROD source book
3. The rules are relevant for both manufacturers and distributors.

Question 2

Define what a manufacturer and a distributor are

Answer 2

1. Manufacturer -
   A firm which creates, develops, issues, and/or designs investments, including one advising corporate issuers on the launch of new investments
2. Distributor -
   An investment firm that offers, recommends or sells investment products or provides investment services to clients

Question 3

Under the PROD - what are the obligations for manufacturers?

Answer 3

1. Product design, including product charges, should meet the needs of the target market and the firm should identify group groups for whom the product is unlikely to be suitable
2. Firms should consider the impact of new products on the orderly functioning of the market.
3. Products should be stress tested
4. Charging structure should be assessed to ensure it’s appropriate.
5. Distribution strategy should meet the needs of the target market.
6. Firms working together to develop a single product should have a written agreement setting out the share of these responsibilities.
7. Compliance function of the firm should monitor product governance, and firm management board should have effective control and oversight over the process
8. Firms should provide relevant information to distributors.

Question 4

Under the PROD - what are the obligations for distributors?

Answer 4

1. Before distributing a product, firms should consider for which target market it is likely to be suitable and any groups for whom its unlikely to be suitable
2. Firms should gather the relevant information from manufacturers.
3. Distribution strategy should meet the needs of the target market.
4. Product should be reviewed regularly to confirm their remain consistent with the target market’s needs. Changes to the distribution strategy and other processes should be made if problems are identified.
5. Firms should provide product manufacturers with information on sales and, where appropriate, the regular reviews mentioned previously
6. The firm’s compliance function should monitor product governance.
7. Firms’ management board should have effective control and oversight over the process.
8. Firms working together to distribute a single product should share information with other firms in the chain.

Question 5

Briefly explain the concept of Packaged Retail and Insurance- based Investment Products (PRIIPs) regulation

Answer 5

1. Came into force in Jan 2018
2. Designed to protect retail investors (everyday consumers) when they buy certain financial products.
3. Covers investment products where the return (the amount you get back) is not fixed but depends on external factors like stock market movements, interest rates, or other assets that the investor does not directly own.
4. The PRIIPs regulation only applies for a PRIIP is being offered, sold or made available to your retail investor (any investor who is not a professional investor)

Question 6

What are some examples of Packaged retail and Insurance- based Investment Products (PRIIPs)

Diagram on page 146

Answer 6

1. Packaged retail products - regulated funds (non - UCITS retail schemes) and qualified investment schemes (QIS)
2. AIFs, including unregulated collective investment schemes (CIS) like unauthorised unit trusts, private equity funds and hedge funds
3. Insurance-based investment products
4. Investment trust saving schemes.
5. Unregulated CISs that are not alternative investment funds.
6. AIFs that are not CISs such as investment trusts and venture capital trusts…

Question 7

What are NOT some examples of Packaged retail and Insurance- based Investment Products (PRIIPs)

Diagram on page 146

Answer 7

1. Non-life insurance products.
2. Deposits (except structured deposits)
3. Pensions.
4. Annuities
5. Debt securities.
6. ISAs

Question 8

What are the obligations for when a PRIIP manufacturer or any other person changing an existing PRIIP is required to do?

Answer 8

1. A key information document (KID) that firms need to provide for each PRIIP they produce
2. Publish each KID on their website.

Note:
A. A person who advises a retail investor on a PRIIP , or sell a PRIIP, to a retail investor must provide the retail investor with a KID well in advance before any transaction is concluded

B. This will also impact intermediary such as distributors

Question 9

Briefly explain what a KID (key information document) is

Answer 9

1. It helps retail investors understand an investment product before they buy it.
2. Required under the PRIIP regulation
3. KID is a:
   A. Standalone document (provided separately from other paperwork)
   B. Prepared for each investment.
   C. Can be up to a maximum of three sides of A4 sized paper.
   D. It can refer to other documents, such as a prospectus, for additional information.
4. A single KID can cover multiple options within one product. For example, a life insurance policy with different investment choices/options can be explained in a single KID

Question 10

Each KID needs to contain some mandatory information/ sections.

What are the sections?

Answer 10

1. What is this product?
2. What are the risks and what can I get in return?
3. What happens if (name of the PRIIP manufacturer) is unable to pay out?
4. What are the costs?
5. How long should I hold it? And can I take money out early?
6. How can I complain?
7. Any other relevant information?

Note: although UCITS schemes are PRIIPs - the requirements in this regulation will not apply to such schemes until 31st December 2026. For these schemes, firms will need to apply the existing KIID.

Question 11

Briefly explain what the Key Investor Information Document (KIID) is and who it’s aimed at?

Answer 11

1. Aimed that retail investors.
2. Should be written in a concise manner in non-technical language and presented in a way that is likely to be understood by retail investors.
3. Must be fair, clear and not misleading
4. Should consist only of the kind of information that potential investors need to make an informed investment decision.

Question 12

With regards to the KIID - what information should this document contain with respect to the UCITS scheme?

Answer 12

1. Identification of the scheme.
2. A short description of its investment objectives and investment policy.
3. Pass performance presentation or, where relevant, performance scenarios
4. Costs and associated charges.
5. Risk/ reward portfolio of the investment, including appropriate guidance and warnings in relation to the risks associated with investments in the scheme.

Question 13

Explain what the difference is between KID and KIID

Answer 13

1. KIID (Key Investor Information Document) – for UCITS funds
2. KID (Key Information Document) – for PRIIPs (a broader range of investment products)
3. UCITS funds use KIIDs instead of KIDs, but this is likely to change in the future (after 31st Dec 2026)

Question 14

For firms that provide non-PRIIP products to retail clients - What are the names of the two types of documents that should be provided to the retail client by the ?

Answer 14

1. key features document
2. key features illustration (unless the packaged product is a unit in a regulated collective investment scheme where a KIID is provided I.e. cash ISAs and annuities)

Question 15

Explain what a key features document is

Answer 15

1. Includes enough information about the nature and complexity of the product.
2. Information on how it works
3. Any limitations or minimum standards that apply.
4. Material benefits and risks of buying or investing for a retail client.
5. Helps retail clients understand what they are buying and make informed decisions on whether it’s right for them.

Question 16

what should the key features document explain?

Answer 16

It should explain:

1. Arrangements for handling complaints about the product.
2. Compensation that might be available from the FSCS if the firm cannot meet its liabilities in respect of the product (i.e if the firm fails/ bankrupt)
3. Whether or not a right to cancel or withdrawing the product exists after purchase.

Question 17

Explain what the key features illustration is

Answer 17

1. A document that provides a personalized example of how a financial product might work for a specific customer.
2. Often used for insurance-based investment products, pensions, and certain savings plans.

Question 18

What should the key features illustration explain/ contain?

Answer 18

1. Projected returns – Estimates of how much the investment might be worth over time, based on different growth scenarios.
2. Costs and charges – A breakdown of fees, including how they might affect returns.
3. Contributions and payments – How much the customer is expected to pay in and what they might get back.
4. Risk factors – Key risks that could impact the investment.
5. Guarantees (if any) – Whether the product offers any guarantees, such as a minimum payout.
6. Information about any interest that will be paid to clients on money held with an a personal pension scheme bank account

Question 19

What is a non-PRIIP?

Answer 19

Non-PRIIPs are typically more straightforward, where the return is either:

1. Fixed or guaranteed (like a savings account)
2. Directly owned by the investor (like shares or bonds)

They need other disclosure documents, like a Key Features Document (KFD) or a prospectus, depending on the product.

Question 20

For non-PRIIP products, a Key Features Illustration (KFI) should include important financial projections to help the retail client understand how the product might perform over time.

What should this include?

Answer 20

1. A standardised deterministic projection A. A single, fixed projection based on set assumptions about growth and performance.
   B. Does not vary with probabilities but provides a straightforward estimate.
2. Consistency between projections and charges information, ensuring:
   A. Same intermediate growth rate and assumptions for regular contributions –
   I. The illustration should use the same expected growth rate and assumptions when showing how contributions build over time.

B. A projection in nominal terms (before adjusting for inflation) should be shown alongside:
I. An effect of charges table, which shows how fees impact the final returns.
II. Reduction in yield (RIY) information, explaining how much returns are reduced due to charges.

C. A projection in real terms (adjusted for inflation) should also be included with:
I. A matching effect of charges table.
II. Reduction in yield (RIY) in real terms, showing the impact of charges after considering inflation.

3. Stochastic projections (optional) –
   A. These projections consider different possible future outcomes based on probability models.
   B. They can be included only if it is reasonable to believe that the retail client will understand them.
   C. However, the most prominent projection must always be the standard deterministic projection to ensure clarity.