Industry Voice: PROD-proofing your business

For many advisers, the PROD regulations (‘Product Intervention and Governance Sourcebook’) introduced by the FCA with MiFID II have sneaked in under the radar. The regulations were introduced in January 2018 and to date many advisers are still unsure of their ability to evidence compliance with these new rules.

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At Schroders, we recognise this challenge. To help advisers with their PROD compliance journey, we teamed up with financial services consultancy the lang cat to produce a guide titled ‘How to prod proof your business'.  The guide is available to download from our website. It  covers some of the highlights of PROD and busts five myths that surround it:

Myth #1: The regulation doesn't apply to me

The regulator has, interestingly, classified advisers as ‘distributors' for the purposes of PROD. We think this feels somewhat backward looking! The financial advisers I work with deliver financial planning. They don't sell or distribute products. However, having been classified as distributors by the FCA means that compliance with the regulations is required.

Myth #2: It's all about segmentation

The rules don't specifically require financial advisers to segment their client bank but state that ‘distributors' have to ‘identify the target market and their distribution strategy'. They must also  ensure that financial instruments will be distributed in accordance with ‘the needs, characteristics and objectives of the target market'.

Whilst ‘segmentation' isn't mentioned in the regulations, it's unlikely that clients all have the same requirements or that offering one set of services and a single investment solution will suffice. Applying some form of segmentation should therefore help when complying with the PROD rules. It might also help to understand the client bank better and develop a more efficient product and service mix.

Myth #3: The most popular method of segmentation is by client size

Whilst research[1] indicates that this is largely true, it's not necessarily the most appropriate method. Back in 2012[2] when the regulator stated that ‘where a firm has a diverse client base, it may wish to consider segmenting its clients‘, many advisers were simply segmenting by portfolio size and then applying different service propositions to each group. Often the services were the same; for example, meetings and reporting, but the key difference by segment was the frequency of delivery.

PROD has helped many advisers to reconsider this type of segmentation, with lifestage - for example - being a popular option. Advisers are often then developing ‘sub segments' to help focus on clients needs, wants and attitudes. For example, if an adviser has a ‘later life' segment then some clients may need to generate income. Some may want to pass on wealth. Some might require careful IHT planning, with Power of Attorney, wills and trusts being a priority.

The range of investment solutions also needs to be considered. Do clients want an active, passive or hybrid solution? Is there a focus on costs or do some clients want to put their money to good use and invest in sustainable solutions.     

Myth #4: Documenting this is a challenge

Our step-by-step guide helps advisers to consider the documentation they should have in their business and suggests a simple framework for this. The golden rule is always ‘if it's not written down, then it didn't happen', so why take a risk? The PROD documentation should simply sit alongside the documented platform due diligence and investment research processes. 

 Myth #5: It's just a version of individual client suitability

In some ways this could be true, but if the business has three policy documents: PROD Target client analysis, platform panel and investment proposition, then advisers should have a range of client services, third-party platforms and investment options available for each segment to avoid ‘shoehorning' and ensure appropriate customer outcomes.  



[1] State of the Adviser Nation, Lang Cat, November 2018

[2] Assessing suitability; Replacement business and centralised investment propositions, July 2012

 

Gillian Hepburn, Intermediary Solutions Director, Schroders

 

 

Important information

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Schroders has expressed its own views and opinions which may change.

This information is not an offer, solicitation or recommendation to buy or sell any financial instrument or to adopt any investment strategy. Nothing in this material should be construed as advice or a recommendation to buy or sell. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions. No responsibility can be accepted for error of fact or opinion. Issued in November 2019 by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU, registered No. 1893220, who is authorised and regulated by the Financial Conduct Authority.

[1] State of the Adviser Nation, Lang Cat, November 2018

[1] Assessing suitability; Replacement business and centralised investment propositions, July 2012 Advertisement

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