In the first of a three article series for Professional Adviser, based on an upcoming white paper, Ben Peele details how advisers can best tackle and comply with PROD rules
PROD (product intervention and product governance sourcebook) was introduced alongside the second iteration of the Markets in Financial Instruments Directive (MiFID II) in January 2018 by the Financial Conduct Authority (FCA). It is here and needs to be dealt with.
Unusually for a new regulation, PROD isn't actually an acronym, it is an abbreviation. However, we think the acronym works well as a reminder of the key features of any PROD approach in that it must be:
Although potentially challenging to start, there are many benefits advisers can gain from formulating and implementing a solid PROD approach. Remember, this regulation is live, so there is no time to waste in getting started.
One expert told us that "PROD really just formalises the RPPD [Responsibilities of Providers and Distributors for the Fair Treatment of Customers] guidelines which have been around since 2006" so in a sense the ethos behind PROD should not be new to anyone in our industry.
However, the big difference is that while PROD offers guidance it is actually a set of rules, so advisers must comply with them or risk facing some onerous sanctions.
The FCA's stated aim was to ensure greater accountability and oversight for all parties involved in the provision of financial advice and products to the end-client. In order to get more granular on requirements they split the financial ecosystem into two camps: "Distributors" and "Manufacturers".
Manufacturers must correctly identify the target market for their products or services. Distributors must perform a Target Market Assessment (TMA) on who they are distributing to and align the products or services they are distributing to the correct recipients. Obviously, they should only select a product or service for a particular segment if is aligns to the target market as outlined by the Manufacturer.
All of this should be a good thing as end-clients will end up with products or services that exactly suit their requirements, rather than being defaulted into the solution that their advisers have historically used.
In general terms PROD touches on the critical issues of suitability, segmentation, treating customers fairly (TCF) and value for money. These are all perennial favourites of the regulator and will be the first things they ask about were they ever to come knocking.
Target Market Assessment is the official term used in the PROD handbook for deciding who your product or service is suitable for. This is interchangeable with the more commonly used Segmentation exercise.
The PROD Methodology you follow will result in a PROD Map which shows a number of segments (or sub-segments), each of which describes a group of end clients for whom the same investment and platform solution is suitable.
Your PROD Approach describes the entire process from start to finish which results in a PROD Policy being documented for your business.
The big six
Three regulatory firms (Diminimis, Timebank, ThreeSixty) were represented at our PROD roundtable and we supplemented this with the input of one additional expert (Compliancy Services) who couldn't attend in person. Here are six key takeaways for advisers:
- Documenting every step of your PROD process is critical. You will need the full audit trail if the regulator ever comes calling.
- Do not treat PROD as a tick-box exercise. Your job is not done just because you have produced a PROD policy. You need to evidence that your firm is complying for each client on a daily basis.
- You will definitely need multiple client segments given FCA guidance that the "target market should be identified at a sufficiently granular level". However, many segments used in the past (such as how much money the client has to invest) will not be an acceptable way of segmenting clients in the future.
- Understand how many investment (and platform) providers you need - you absolutely should have enough to cover the breadth of your client requirements. However, it is hard to be PROD compliant if you have multiple providers in every segment.
- Ensuring consistency of approach across all your advisers will be critical for anyone running a firm of more than one adviser. After the arrival of the Senior Management & Certification Regime responsibility for complying with PROD will fall to the MD so they can no longer afford to let advisers ‘do their own thing'.
- Do not create too complex a system. Simplicity is your friend.
The next article in this series is set to be published on Wednesday 4 December.
Ben Peele is managing director of PortfolioMetrix UK
Investors lost £3m
Advisers are facing a number of new regulations to contend with. From the new PROD rules to MiFID II, there is a sea change in the regulatory landscape that advisers are operating in.