17 February 2020
What is PROD?
PROD or Product oversight and governance refer to the systems and controls firms have in place to design, approve, market and manage products throughout the products’ lifecycle to ensure they meet legal and regulatory requirements. It requires manufacturers and distributors to hold good product governance.
With the implementation in January 2018 of the MiFID II rules of which PROD formed part of, and the IDD it was easy to miss this one. But, with the recent Dear CEO letter which urges adviser firms to ensure advice is suitable, all costs and charges disclosed clearly and acting in clients best interest, which is effectively PROD, we would urge you to revisit the rules on this piece of regulation to ensure you are complying, as the data requests from the regulator are starting to go out (Feb2020).
With further requirements this year requiring firms to consider ESG, Environmental, Social and Governance preferences, it would be a good opportunity to amalgamate the two into your review and integrate this into your investment process. We will be blogging on ESG requirements very soon and it’s definitely one to look out for, another one with the potential to slip under the radar.
The question is – Are you complying with PROD? If not, simply put, there is a potential rule breach.
Adviser firms are required to fully understand the products that you ‘distribute’, ensure that they are compatible with your clients and in line with the manufacturers’ target market information and then conform to the best interests’ requirements.
So, where a client has been identified as having a need, you will be expected to show exactly why what you have recommended was appropriate for their needs. This would be both product and fund
With the introduction of RDR, many advisory firms began establishing Investment Processes and CIPs. Most firms segregated based on assets under management with a corresponding service agreement and adviser charge. But to adhere to the PROD rules this basis is flawed.
Clients with the same value in assets will have very different investment, life stage needs. Client A may be relatively young, have a young family with a range of investment/pension and secondary needs, Client B may be older, may still be working so still accumulating pension funds and no additional needs other than IHT planning. Firms are required to provide products and solutions that best meet their individual needs.
On the face of assets under management, they are in the same segmented group and paying the same in fees and get the same service. Is this really TCF or showing an understanding and compliance of the PROD rules. We would urge any firms who have a segmented investment process based on AUM to review this in line with the PROD rules without delay.
SO what should you be doing?
The starting point would be what service levels are you offering
Who are you excluding, especially for firms who only have one service level – 3% + 0.5% for example?
What solutions are you offering and who are they suitable for? For example, we worked with a firm who had a small group of young city high flyers who wanted something to invest in that was slightly higher risk than the norm. The firm developed a segment and products to accommodate this with a service level to fit.
What segments of client require platforms, not all clients will do.
By undertaking this process you will potentially end up with many more segments than the standard AUM model with three segments.
By doing this you will be able to evidence that you have a consistent and repeatable approach for all clients that you are able to advise to.
We would urge you to contact us where you have concerns over your compliance with these rules. You can get in touch by calling 0161 521 8641 or email [email protected]