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November 2019

CLEVE R ADVISE R

IS PROD JUST ANOTHER BOX TICKING EXERCISE? Clever Adviser’s George Cliff assesses the FCA’s PROD initiative and suggests that there are good reasons for advisers to see it as a robust and compliant template from which to deliver positive client outcomes.

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esigned by the Financial Conduct Authority (FCA) to ensure compliance with MiFID II, PROD – or the ‘Product Intervention and Product Governance Sourcebook’ to give it its full name – is part rulebook, part template and to date has been met with mixed opinion. The intention is to ensure MiFID II guidelines are consistently met, with special focus on ‘good product governance’ and product suitability, something many financial planners believe they are doing a good enough job of already. However, as is so often with financial regulation, it is not the doing that matters, it’s the documenting. PROD requires that products should clearly meet the need of one (or more) identifiable target market(s), that products should be sold to those identifiable target markets via the appropriate distribution channels and that these products should deliver appropriate client outcomes. The achievement of this, and the clear and auditable demonstration of it, thereafter, is defined as ‘good product governance’. The insinuation here is not that firms aren’t doing this already, but rather that PROD requires you do more of it and make note of every decision along the way.

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COMPLYING WITH PROD You must first define your target markets, these being well-defined groupings of clients that share similar characteristics and needs given their circumstances and personality profiles. Simply grouping by assets under management will not be enough under the new rulings. Advisers should seek to segment on more uniting qualities like life stage and appetite for risk. Once you have narrowed down your target markets, you are in a well-informed position to identify appropriate products, ensuring diligent analysis to keep PROD happy. The product must meet the various needs of the target market, be it low volatility income portfolios as an example or otherwise but must also tally up with the target market defined by the product provider. Each product is built with a target market in mind, this made clear within the objectives and risk profile of the product, and it is the responsibility of the adviser to ensure this marries up with their own client segment and their needs. This end to end suitability, and clear evidence of it, is absolutely crucial to the compliance with PROD rulings.

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