29 April 2018
The FCA’s Product Intervention and Product Governance Sourcebook (PROD) came into force alongside other MiFID II provisions on 3 January 2018.
At first, it was little discussed. But over the course of 2018 the implications for platforms and advisers featured more frequently in the trade press and on conference platforms.
By late 2018, research by platform consultancy the lang cat found that amongst more than 200 advisers surveyed, 80% were aware of PROD. But 60% felt they were currently unable to evidence compliance with its requirements1.
Then, in January this year, FCA Chief Executive Andrew Bailey made clear that a review of product governance would feature on the regulator’s agenda for 20192.
It seems the PROD regulatory rubber is about to hit the road. So, for anyone still to get fully to grips with PROD, it’s probably a good idea to do that now.
A quick overview
PROD is there to make sure that products distributed to consumers (1) meet the needs of one or more identifiable target markets; (2) are sold to clients in the target markets by appropriate distribution channels; and (3) deliver appropriate client outcomes.
Product for this purpose is an investment product (a financial instrument in FCA glossary terms, including structured deposits) rather than a tax wrapper or the platform itself.
For advisers, one view is that PROD simply formalises FCA expectations around the suitability dimensions for investments that have always been there and that make good business sense.
If you are running a centralised investment proposition (CIP), it needs to be broadly suitable to meet the needs of whatever segment of your clients it’s designed for. If you are recommending that CIP or any other investment solution to a client, you need to demonstrate it’s suitable to meet their individual needs. And you need to be able to evidence both to the regulator’s satisfaction.
Getting in to the detail
PROD includes specific requirements for both manufacturers (the investment houses who provide the financial instruments) and distributors (platforms and advisers).
For example, there are information requirements on manufacturers to be clear on who the target market for each of their products is and to make sure their associated distribution strategy is appropriate for that market. They also need to ‘take reasonable steps to ensure that the financial instrument is distributed to the identified target market’ (PROD 3.2.1(3)).
Distributors are in turn required to be clear on product target markets when making decisions about investments relevant to their clients, using relevant information from manufacturers. They also have obligations to provide information about their use of products back to manufacturers to help them with regular product reviews.
Working together to meet our obligations
Together, Alliance Trust Savings and your business form a ‘chain of distributors’ under PROD. And we each have defined responsibilities in the chain (PROD 3.3.32-33).
It’s our responsibility to give you access to the target market information provided by manufacturers. And we do that by giving you access to KID/KIIDs and Prospectuses for the financial instruments that are tradable through our platform. We’re also responsible for supplying manufacturers with information they need about the use of their products through our platform.
It’s your responsibility to make sure that how you use products to meet your client needs is appropriate and takes the manufacturer’s intended target market into account.
If needed, through both our Funds and Funds Plus investment propositions you’re able to access information about clients and their investments that can help you to analyse the shape of your existing client base. This may be useful for both forward looking segmentation exercises and checks to confirm your existing business looks healthy in PROD terms.
Our decision to offer two investment propositions was also influenced by your potential need for different options to meet the needs of different client segments, including outlier clients who may have specific requirements compared to the rest of your book - around listed securities for example.
Taking control and leveraging the opportunity
Of course, it’s for you to decide what’s needed to ensure PROD compliance for your firm. As a place to start, we’ll leave you with our round up of some industry voices in the trade press, and what they have had to say about taking control of PROD and leveraging the opportunity it potentially presents.
Ensuring suitability for the client is the most important role an adviser plays, and the PROD requirements, while perhaps being a chore, will help embed positive outcomes into a robust, repeatable process.
By having a defined process, aligned to the requirements of PROD, advisers can also go some way to helping define the question of ‘value for money’ that is also being posed by the regulator.
Now the regulator can say ‘show me the process you went through to figure out what your target market is and how you designed your advisory service to suit clients you've got.
In some form or other, on a bit of paper, you need to write down: this is our target market and we've designed our investment solutions, platform selections and services in this way in order to work for that target market. You've got to write it down.
In short, advisers need to get strategic with their client segmentation … [and] factor in client behaviours, their propensities to buy certain products, sensitivities to fees or market movements and, of course, aligning client risk profiling and capacity for loss with product risk profiles.
This requires plenty of focus and skill but, if executed correctly … means high competitive advantage. Why? Well, because firms will ensure their clients are gaining maximum value in providing a bespoke service and advice process with the right products to meet their ongoing needs."
Prod will become increasingly important to the regulator, as it sits at the heart of the long-held FCA belief about keeping the client at the centre of the adviser business.
… we are all familiar with client segmentation based on the size of assets under advice and building different style services around that
… But Prod requires advisers to be much more granular in their solutions.
The forensic analysis requires firms to look at their client bank, understand what the clients’ needs are, and then devise advisory services that work for all of that.