Hands up who has heard of Prod, or the new Product Intervention and Product Governance Sourcebook, to give it its full title?
Prod was introduced under the Mifid II product governance rules that were launched back in January but has largely gone under the radar since then.
I suspect the collective torpor to do with Mifid II is to blame. However, advisers would be wise to recognise that it is not something that is going to go away. Mifid II will continue to present challenges into next year.
While it applies to all financial services firms, the challenge of Prod for advisers is particularly acute because the rules require them to understand their client bank and target market, and to have them segmented where appropriate.
As compliance consultant and former FCA technical specialist Rory Percival said at a recent conference: “Prod ensures advisers have designed investment solutions for their centralised investment process and advisory services, which work for clients and the different segments of the clients.
“But that they genuinely start that process with the client. I do not think firms do; in fact, I have never met a firm that has genuinely done that.
“Advisers have developed their services and CIPs over time, but they have not started that process with an analysis of their client bank.”
Prod will become increasingly important to the regulator, as it sits at the heart of the long-held FCA belief about keeping the client at the centre of the adviser business.
It provides the FCA with a tool to ensure firms genuinely do this. Advisers ignore the rules at their peril.
Most firms will fall down when it comes to the written element of the regime – that is, they must write down how they have segmented and sub-segmented their clients, devised investment solutions and criteria for platform selection processes, and mapped those against client needs.
For instance, we are all familiar with client segmentation based on the size of assets under advice and building different style services around that.
Most firms provide investment strategies which distinguish between accumulation and decumulation too.
But Prod requires advisers to be much more granular in their solutions.
In the decumulation space, for example, advisers will need to develop and record an investment strategy that distinguishes between clients taking minimum and maximum drawdown.
The forensic analysis requires firms to look at their client bank, understand what the clients’ needs are, and then devise advisory services that work for all of that.
I can see us having to address a collective problem.
If Percival believes he has never met a firm that has built out a proposition using the client as a starting point, this would make many an easy target for enforcement action.
Tim Sargisson is chief executive at Sandringham