By Sian Davies Cole CFPᵀᴹ MCSI Chartered ALIBF
I am sure you have heard about PROD, but you may be thinking, “what the hell is it?” and “do I need to do anything about it?” To answer the second question, yes, it is likely that you do, if you haven’t yet already. To understand why you need to act on PROD, and how, you first need to understand what it is.
PROD was introduced by the FCA in January 2018, within the Product Intervention & Product Governance Sourcebook (PROD) Rules.
In brief, you need to be able to show that the investment solution and products being recommended meet the need of your target market and deliver good client outcomes. Although we know that many Financial Planners are already doing this, you need to make sure you can evidence that:
1. you have a clear target market;
2. you can clearly define your distribution strategy;
3. you can easily identify any group of clients for whom a product or service is not appropriate.
This is not new guidance, but instead, is a continuation of the FCA Handbook, and any failure to put this into practice could result in enforcement action by the FCA. Therefore, it is extremely important to make sure you are documenting this correctly.
What do you need to do?
Firstly, you need to understand your role as a ‘distributor’ and the requirements for any company described as a ‘manufacturer’.
It could be seen as ironic that rules and guidance put in place by the regulator state to make sure that clients are being provided with suitable advice, and not being siphoned into unsuitable investments, they are using language which makes us sound like a production line in a factory!
So, what is a ‘distributor’?
This is explained by the FCA as someone recommending or selling an investment or providing an investment service to a client, someone advising on or proposing a contract of insurance to a client and someone arranging a pathway investment.
What is a ‘manufacturer’?
This is explained by the FCA as someone creating, developing, issuing and/or designing an investment, someone creating, developing, designing and/or underwriting a contract of insurance, or someone creating, developing, designing, issuing, operating and/or underwriting a pathway investment.
It also covers funeral plans under both the distributor and manufacturer categories.
Therefore, most Financial Planners are likely to fall under the distributor category, with providers falling under the manufacturer. Although there may be some crossover for both Financial Planners and providers, depending on their business model, you should ensure you are aware of the rules which apply to both.
Putting PROD into practice for a ‘distributor’
Step 1 – is to identify your current client base, and who is your target market. You could do this by considering the following:
- Their stage of life
- Whether clients are accumulating assets or drawing on them.
- Their attitude to risk and/or capacity for loss – should clients have different solutions based on their risk tolerance as well as life stage?
- Their income requirements.
- Clients’ investable assets or overall wealth.
Step 2 – once you have identified your target clients, you will then need to consider the right service and proposition for them, for example:
- How often will you meet with them and carry out a review?
- Will they get any ad hoc service?
- How will you communicate with them?
- Can you provide the agreed service cost effectively?
- It is also important to consider clients who do not fall into your target market and consider an alternative solution for them.
Step 3 – after the above steps have been taken, you can then consider the appropriate solutions and products for each client segment. Thoughts to consider here:
- Is the complexity, cost, and level of service appropriate for the client?
- How often will their portfolio be rebalanced?
- Would it be appropriate to consider a CIP, or could a CRP be more appropriate if the client is drawing on their funds?
- You may also want to think about any sub-segmentation for clients within each target market and whether a different solution is appropriate. For example, you have segmented clients on life stage, but you then sub-segment by investable assets.
Each stage above must be documented and evidenced that it is being used. However, once this is in place, it can be changed and amended as necessary and is not a one-and-done document.
So, hopefully, this has given you the “PROD” to get started, if you haven’t already.
