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Can platforms keep up with product governance rules?

New regulations are causing confusion over which parts of the advice chain are responsible for checking products are appropriate for particular clients.

The Product Intervention and Product Governance Sourcebook, or Prod, is part of the FCA’s Handbook and concerns the manufacture and distribution of financial products and services.

The rulebook was introduced under Mifid II at the start of the year and sets out to “improve firms’ product oversight and governance processes”.

While the rules are clear for firms making a product or recommending one, the responsibilities of platforms – which typically do neither – are causing greater uncertainty.

Product manufacturers must consider the nature of the service or instrument that they are building and the target market that it is intended for, taking into account the clients’ needs, characteristics and objectives. They must also take reasonable steps to ensure that it is distributed to that target market.

A ‘distributor’, meanwhile, must understand the financial instruments that it is offering to clients and assess how compatible the product is with the needs of the clients to whom it distributes the services.

Other firms which may offer platform services and also manufacture their own products – providers that offer multi-manager solutions, for example – may have to consider elements from different areas of the sourcebook.

The FCA’s definition of a distributor – “a firm which offers, recommends or sells investments or provides investment services to clients” – suggests that platforms fall into this bracket and will have to take the requirements of Prod seriously or risk falling foul of the regulator.

Yet there is concern among commentators that, instead, many platforms may think the rulebook does not apply to their business.

TCC director Phil Deeks says: “I have heard the ‘it’s not our responsibility argument’ from some providers and I don’t think it’s going to fly. I think the regulator believes they have a role to play and Prod refers to all parts of the chain.”

CWC Research senior partner Clive Waller says: “Crucially, in this regulation, the FCA does not use the word adviser; it uses the word distributor, and the regulator categorises a platform as a distributor.”

Yet the relationships advisers and platforms have with end clients is clearly very different. It could be that more clarity is needed, and the definition of distributor needs to be amended.

Deeks says: “When this legislation was started in 2007, platforms didn’t really exist but now there is a growing realisation that there is a big difference between a manufacturer and a distributor and a lot in between.”

Waller adds: “The difference between advice and guidance was a classic case of a misuse of the English language and this is another example. There is no strict definition of what a platform is and, until one is agreed, it’s difficult to make legislation concerning who does what and what responsibilities businesses have.

“It’s very grey even within platforms – Transact, for example, is very different from Hargreaves Lansdown – and that creates confusion.”

Platforms have to understand their products and target markets, but it is not their responsibility to ensure suitability for investors

Platforms’ own interpretations of the rules and how they apply to their business seem to vary.

AJ Bell head of risk Mona Christensen says: “Platforms are required to ensure they understand the products they are distributing, including determining a target market, but it is not their responsibility to ensure suitability for investors.”

She believes that platforms should ensure that the products they offer are compatible with the needs, characteristics and objectives of their target markets. To that end, AJ Bell has removed some products from its offering so that they are no longer available through its direct-to-consumer platform after being identified as not being targeted at non-advised clients.

The firm says it provides risk warnings for all collective investment schemes that it does offer, with additional warnings for products deemed to be more complex. Access to the latter is restricted to customers who have completed an assessment of their knowledge, experience and risk appetite. Finally, retail customers do not have access to institutional share classes.

There is also evidence of this even on platforms that do not have an adviser side to their business. Hargreaves Lansdown, for example, which is direct-to-consumer only, asks investors to declare that they are “sophisticated” enough – that is to say they have the knowledge and net wealth – to access some of the more complex investments it offers.

Hargreaves Lansdown senior analyst Laith Khalaf says: “We are execution-only and that means people make their own investment decisions but we still need to provide a lot of information to them; it’s a heavily regulated business.”

Christensen also thinks that platforms should work with fund groups, providing feedback on matters such as complaints, comments from advisers or customers and sales data regarding their products.

Seven Investment Management head of platform Verona Smith is less convinced that the sourcebook is relevant to platforms. She says: “Platforms don’t gather the relevant information to be able to provide investment suitability to clients.”

However, she agrees that the businesses do have a role in working with manufacturers and advisers. She says: “Platforms still need to work with advisers and fund houses to ensure an appropriate range of funds is available to investors.”

Pilot Financial Planning adviser Ian Thomas agrees: “It’s always been in our terms of business that we will regularly check the ongoing suitability of products, but I don’t think a platform has a requirement in that sort of role.”

He believes that platforms are already working with advisers to ensure that information is readily available both to them and clients to help determine suitability.

He says: “We use Nucleus regularly and when you create a portfolio it will generate a single document with all the key information documents, rather than having to send clients 20 individual documents, for example.”

But Deeks thinks that all financial services businesses should be giving the matter thought, regardless of whether the definition of distributor exactly matches their offering.

He says: “Platforms should be thinking about what sort of funds and providers are available through their service, what clients they might be suitable for and how they are stress-testing and scenario-testing cyber security.

“It’s very easy to take a literal interpretation of Prod and say it doesn’t apply but I think that’s quite short-termist. If you’re in the financial services chain, it applies to you, it just depends to what degree.”

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Control of the asset universe is one of the biggest risks faced by many platforms. As distributors they need to consider PROD and should have been looking at the RPPD requirements and TCF. The FCA probed the presence of unregulated collectives on platforms some time ago and controls over access, especially to orphan or D2C clients is essential.

    Any platform worth its salt will have an investment take-on committee that considers any new assets permitted included whether they are available in certain wrappers, just as transfers from existing portfolios or banned completely.

    Platforms are not responsible for suitability but ignoring their responsibilities in the distribution chain is likely to lead to problems.

  2. I really don’t follow this debate at all. A platform is a utility – nothing else. Do you blame the knife and fork if you have a bad meal?

    Where a platform treads in dangerous waters is when they offer pre-packaged portfolios. Keep way from this and just provide the service and I don’t see a problem.

    • The problem is that it is often the firm with the deepest pockets that pays. Platforms that run wrappers like SIPP or ISA have to obey HMRC rules and only permit investments that meet ISA requirements or can be used to pay a pension. If they offer offshore or onshore bonds they have to meet the requirements of the life companies for permitted assets and should restrict offshore assets to gross where available.

      If a platform allows unregulated collectives but puts no controls over access then what is to stop an customer buying it direct in breach of the rules on distributing unregulated assets?

      Only a foolish platform would go with the ‘anything goes’ mentality. Many platforms that took a loose approach to accepting off piste investments when they were attracting assets under management are now living to regret that decision.

      Model portfolios that contain assets which cannot be readily traded can lead to an administrative nightmare.

      Don’t forget that as many platforms are also CASS firms where the presence of liquidated stock and execution failures can lead to numerous reconciliation breaks and CASS breaches that can result in very large fines and enforcement action.

      Platforms wear many hats and facilitate the distribution of investments and packaged products to retail clients. As regulated firms they ignore their responsibilities at their peril.

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