In January 2018, the FCA’s Product Intervention and Product Governance Sourcebook (PROD) rules came into force alongside other MiFID II provisions.
The purpose of PROD is to ensure that the investment products that are recommended to clients:
- fulfil the needs of one or more identified target markets
- are distributed appropriately
- deliver appropriate client outcomes
Despite PROD being over a year old, few firms are acting in accordance with their regulatory requirements. In fact, former regulator Rory Percival has estimated that less than 5 per cent of firms in the UK are complying with PROD, and this figure may even be as low as 1 per cent.
To help your firm meet its regulatory duties, we’ve developed this three-part blog series on PROD.
We aim to help you understand more about the PROD rules, what a firm’s obligations are under PROD, and provide an overview of the key steps you can take to help your firm meet the regulatory obligations.
Understand your target markets
The PROD governance rules are intended to ensure products are distributed to, and meet the needs of, the appropriate target market.
In PROD terms:
- A target market is the type of client for which each financial instrument or ‘product’ was designed for and distributed to
- A ‘product’ is an investment product – a financial instrument in FCA glossary terms, including mutual funds, structured deposits etc. – rather than a tax wrapper or the platform itself
Firms must have thought about their clients, identified their target markets, and have appropriate governance and distribution strategies in place for their target markets.
Ultimately, if the regulator gets in touch with a firm and asks: “Show me the process you went through to identify your target market and show me how you designed your advisory service to meet the needs of those clients?”, the firm needs to produce satisfactory evidence to demonstrate compliance.
Why defining target markets matters
While you may already be doing what’s needed to meet the standards required by PROD, evidencing this to the FCA’s satisfaction has now become more important than ever. So it’s vital that a firm documents what it’s doing to meet PROD regulatory standards.
In short, a firm needs to be able to say: “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”.
In short, a firm needs to be able to say: "This is our target market and we've designed our investments solutions, platform selections and services in this way in order to work for that target market"
Next steps to help your firm’s compliance
Recognising the differences between different segments of clients, their differing needs, and how best to support these, should be at the heart of your client segmentation. The key elements of your proposition, i.e. service, financial planning and investment management, can then be tailored accordingly.
Here are some points to bear in mind to ensure you are supplying adequate proof to satisfy the regulations:
- Ensure anyone providing advice in the firm is aware of the target markets so these can be considered when giving advice
- Review each investment proposition on a regular basis to ensure it remains consistent with the target market's needs. If there has been any change, then alterations need to be made to either the proposition or the target market
- Keep written records of your process, stating that your target market has been built around your firm’s investment solutions and the firm's service levels to create your own target market
In our next blog, part two of this series, we’ll discuss what can be done to assess and segment your client bank to help your firm meet the regulatory standard.
The value of investments can go down as well as up, and could be worth less than originally invested.
The views expressed in this blog should not be regarded as financial advice.