Tips to help your firm’s PROD reporting

This series of blogs on PROD aim to help you understand your firm's obligations under PROD and help you get started with meeting the PROD regulations.

As we explained in the first part of this series, the Product Governance rules (PROD) were introduced to ensure that advisers are recommending suitable investment products to their clients.

To make sure advisers are following the rules, the FCA has the authority to ask firms how they are matching clients with various financial products.

If a firm is approached by the FCA, written evidence is required to demonstrate that the firm has established market segments, sub-segments, and has detailed documentation to explain how clients are being matched with investment products.

PROD in a nutshell

Should the FCA ask a firm how they’ve identified their target market and how advisers are fulfilling the needs of that particular set of clients, a firm needs to be able to say:

  • This is our target market
  • These are our investment solutions, platform selections and services
  • Our investment solutions are designed in this specific way in order to work for the target markets we’ve described

Furthermore, since the FCA can contact firms at any time and ask to see this evidence, firms need to keep detailed documentation to explain this process.

For advisers running an investment proposition, PROD rules make it clear that the solutions on offer need to be broadly suitable to meet the needs of whatever segment of client it is designed for.

Is your firm ready to provide the FCA with this information? If your firm has not yet implemented this process, it’s time to start.

Put your PROD segmentation in order

Most firms will have done some form of client segmentation. PROD simply builds on this by requiring you to identify a target market in relation to all the products and services your firm offers.

There are several ways to undertake a target market assessment. Your approach is dependent on your particular business but, in general, recognising the differences between various client segments, their differing needs, and how best to support these needs, should be at the heart of your client segmentation.

The PROD regulation will want you to take it a step further and show that the key elements of your proposition, i.e service, advice and investment management, have been tailored accordingly.

Define your client segments

When it comes to segmenting your clients, the first step is to broadly identify clients by type.

As an example, one method some firms use is life stage segmentation. Within life stage segmentation, a firm can segment their client base along the lines of whether they are in the accumulation or decumulation stage of their financial journey. Clients saving for the future will use a different investment approach than those nearing retirement.

Of course, you may wish to use other methods of classification to target segments - it’s your decision.  The important thing is to  compile documentation to show that you’re meeting the regulator’s guidance for client segmentation, i.e. clients should be segmented, not just in terms of how much money they have or what service they receive, but in terms of their specific needs and objectives.

Also, it’s important to show that the segments or categorisation chosen are based on your firm having the necessary skills, knowledge and expertise to service the segment.

Refine your categories by identifying sub-segments

Once you have identified the client types, it's often helpful to split this into further sub-segments. For each segment, you could have several options which would help you identify the most suitable proposition. For example continuing on with the life stage segmentation example, you could then break down each category to identify: 

  • SME business owners
  • Professionals (accountants, solicitors, lawyers)
  • Senior corporate executives
  • Others

Again, the sub-segments firms use are dependent on the particular needs of their business so like the main segments, these sub-segments will vary among firms.  The important thing is to show you’ve assessed the needs of a sub-segmented group and have written evidence to demonstrate this.

Drilling down into more details of your proposition

Going deeper into the details of your proposition can help show that your firm has the governance in place to satisfy the PROD requirements. So in addition to the segmentation described above, it will also be necessary to have documentation explaining your firm’s investment solution, platform, service requirements, and the price of your advice.

Action points and things to remember

The key is to have this process written down. The research should show that your target market has been built around your firm’s investment solutions, using platform selection and the firm's service levels to create your own target market.

This is an ongoing process and you must review the target market and update the product governance arrangements. Each product should be reviewed periodically to ensure it remains consistent with the target market's needs. If there appears to be any movement on this, then changes need to be made either to the product or to the target market

In our next blog, part three of this series, we’ll discuss what can be done to help your firm differentiate your service offer for PROD compliance.

Read the first article in the series: Why PROD rules make it important to segment your target markets.

The views expressed in this blog should not be regarded as financial advice.

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