One year on, some adviser firms are still unclear about their PROD obligations. It’s important for you to make sure you’re informed.
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:
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.
The PROD governance rules are intended to ensure products are distributed to, and meet the needs of, the appropriate target market.
In PROD terms:
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.
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”.
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:
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.