Product governance under PROD: key obligations and common gaps
The FCA's product governance rules in PROD apply to manufacturers and distributors of retail investment products and were reinforced and extended by the Consumer Duty in July 2023. PROD 3 (for MiFID investment products) and PROD 4 (for retail investment products under the Consumer Duty) create a two-sided framework of obligations: manufacturers must design products for identifiable target markets, conduct cost and value assessments, and share product information with distributors; distributors must assess whether the manufacturer's target market definition is consistent with their own client base, must consider whether distribution is compatible with the target market, and must share sales data with manufacturers to support ongoing product monitoring.
Target market assessment is the foundation of the PROD framework and the area where the FCA has found most gaps. A compliant target market assessment must be product-specific, must consider both positive and negative target markets (i.e., the characteristics of customers for whom the product is appropriate and those for whom it is not), and must be based on genuine analysis of the product's features, costs, and risks rather than a generic description of the intended customer type. The FCA has found that many target market assessments are prepared as compliance documents rather than as genuine risk assessments, and that they often lack specificity about the customer circumstances in which the product would or would not be appropriate.
The value assessment obligation under PROD 4 is particularly demanding. Manufacturers must be able to demonstrate that their products deliver fair value — meaning that the total cost of the product is reasonable in relation to the overall benefits delivered to the target market. This is not merely a disclosure obligation: the FCA expects firms to conduct a substantive assessment of value, to identify scenarios in which the product would not deliver fair value (for example, for customers who use the product for shorter than the intended holding period), and to take action where the value assessment reveals problems. The sharing of value assessment information with distributors, and the distributor's obligation to act on that information, creates a new dimension of responsibility in the distribution chain.
Ongoing product monitoring is a persistent gap. PROD requires manufacturers to monitor products after launch, using sales data from distributors and any other available information about how customers are using the product and what outcomes they are achieving. In practice, many manufacturers do not receive adequate data from distributors, and many do not have internal monitoring frameworks that would detect adverse outcomes in a timely way. Under Consumer Duty, the monitoring obligation is explicit: firms must be able to demonstrate that they are actively reviewing whether their products are delivering the consumer outcomes they were designed to deliver, and must take action where they are not.
Distributor obligations in practice
Distributors that have not reviewed their PROD obligations since pre-Consumer Duty should conduct a gap analysis covering: their process for reviewing manufacturer target market assessments; their systems for checking whether sales are within the intended target market; their arrangements for providing sales data back to manufacturers; and their governance oversight of product suitability at portfolio level. Distributors should also consider whether their fee arrangements with manufacturers could raise conflict of interest concerns under PROD and COBS 2.3A inducements rules.