It’s been over a year since the product governance (PROD) rules were introduced, yet there are still a number of firms that have their heads in the sand when it comes to compliance.

    Some firms are confused, some are unclear of the requirements, and some are hoping it will go away altogether.

    The product governance requirements of Mifid II relate to manufacturers and distributors, that is, product providers and advisers and planners. The rules aim to ensure that all parties are acting in the best interests of investors and clients at all stages of a product’s development and distribution.

    However, PROD recognises that some providers and firms may not have a direct relationship with the client, or have first-hand information in order to evaluate the clients’ needs and characteristics.

    Providers need to assess suitability based on their ‘theoretical knowledge’ and past experience of the product or similar products, financial markets, and the needs, characteristics and objectives of potential clients. 

    As a result, PROD was created to help advisers and planners and product providers to communicate with each other to ensure they are both offering and providing the correct products and services to meet clients’ needs.

    For the firms that are yet to complete this process, it is time to take a deep breath and make a start. The FCA is now challenging firms to evidence their process on PROD or face a regulatory breach if this is not available.

    What should you do now?

    The first thing to say is the process is not as complex as you may think.

    You are likely to have either segmented your clients already or started to look at this, and PROD simply expands on this. The further segmentation will split this down into choices of investment solution, platform selection, advice service and also client identification.

    1) Segmentation options

    Your first task when it comes to segmenting your clients is to identify clients by type.

    This shouldn’t be purely based on assets, as clients with the same amount of assets can be in different stages of their life. The segmenting exercise in PROD is about who you feel you can best support as a firm. There are 66 million people in the UK – you can’t be everything to everyone, and you don't have to be.

    In terms of how you segment your client bank, segmenting by life stage is probably the most popular option and the easiest to address. But if you have a specialised client bank you could also segment based on:

    • Career (footballers, vets, dentists etc)
    • Adviser/firm interests. If you find trusts and inheritance tax planning fascinating, segmented clients might be in their 60s and retired. Equally, if you love technology, segmenting could mean supporting millennials through a tech proposition. When segmenting on this basis, the proposition still needs to be focused on the client and their needs.

    2) Sub-sections

    Once you have identified the client type, it's often helpful to split this into a further sub-section.

    For each segment, you could have two or more options which you feel would help you identify the most suitable option. This could be via the client's level of investment experience, for example, are they a basic investor, an informed investor, or an advanced investor. You could then have an alternative or additional filter, such as first job, newly married, or young couples.

    3) Investment solution

    This section will indicate the style of investment that would be chosen for the client, that is discretionary managed portfolio, passive portfolio, centralised retirement proposition (CRP) etc. 

    4) Platform solution

    There's no need to over-complicate this section – you don't need to have a multitude of platforms with each one addressing a specific need.

    You may find it's possible that one platform can meet the needs of all your clients. This could be if the client bank is straightforward or if the chosen platform can be flexible enough to incorporate the needs of all of the client segments.

    Choosing a platform for its ‘low cost’ should not be the only reason to use it, as there still needs to be evidence that the chosen platform can meet the client’s overall needs. 

    If you genuinely only deal with, say, retired deep sea divers who take no more than 4 per cent a year from their drawdown plan and have other secure income – then it is absolutely fine to have a CRP, a single platform and a single service proposition. You do not need to create additional stuff for no reason.

    5) Service requirements

    The final part of the puzzle is to link the need to offer a service to the segmented client.

    It is important to address the different service levels available to meet the appropriate need. For example, this could include a 'lite' service, full service, decumulation service, or no service.

    While anomalies will occur, a good research process should be in place to underpin all this so that you can review the market and find an appropriate solution.

    That way, as and when you come across a client where your default option isn’t suitable, there will be no need for ‘shoe-horning’ to make the default fit.

    Rory Percival has suggested this simple chart as an example for considering PROD requirements which we think is a great starting point:

    Apricity PROD 

    This is an ongoing process and you must review the target market and update the product governance arrangements.

    This may be necessary if a specific product or service no longer meets the circumstances of the identified target market, for example, if market conditions change and volatility alters where the product sits within a risk profile, or if the underlying assets becomes illiquid and the structure of the investment changes.

    Action points and things to remember

    • Ensure all advisers in the firm are aware of the target markets, so these can be considered when giving advice.
    • 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.
    • You will need to report any sales outside of the target market back to the provider. There are however, no rules to say selling a product outside its target market is necessarily wrong.
    • The key is to have this process written down. The research should state 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.


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