The Product Intervention and Product Governance Sourcebook – or Prod as it is more commonly known – is a pretty big deal. Actually, it is a very big deal.
Do not beat yourself up if you are not Prod ready yet – there has been quite a lot going on over the past year or so. The regulator has even accepted this and been relatively low key on it to date. But this will change over the next 12 months because it knows the beneficial impact is massive.
Some will inevitably feel it is just more pointless regulation, designed to make everyone’s life even harder. But, in fact, Prod is going to make everyone’s life better, from providers and advisers to, most importantly, clients.
What is Prod?
An accusation often levelled at the regulator is that it does not tell advisers what to do, it just gives them enough rope to hang themselves with. Well, in this case, Prod is a rule, so it is very clear and not optional.
Introduced on 3 January 2018, the Prod rules affect two groups:
- Product manufacturers (providers)
- Product distributors (advisers)
The aim is to ensure different types of clients are exposed to appropriate types of product. So, the manufacturers outline what type of client their product is designed for and the advisers have a clear outline of who to deliver the service to.
Prod is a matchmaking service; the new Cilla Black. It ensures that when the product manufacturers say you are buying a tin of baked beans, you do not end up with a tin of exotic fruit cocktail.
This is essential for firms in maximising the chances of the correct client outcomes. It also helps reduce the financial and PI risk to the business and is a great tool to use in implementing Mifid II interim suitability assessments too.
How does Prod work?
Advice firms will currently conduct product research to compare what is in the market based on factors such as cost and functionality. This primarily covers what the product provides.
Separate to this will be the due diligence carried out on the actual provider, covering areas such as financial strength, corporate governance and so on. There is a significant difference between research – what a product is like – and due diligence – what the company providing a product is like.
Without this information, it is difficult to provide evidence that demonstrates the investment is designed for the target market it is being recommended to and is being operated in a manner likely to produce the correct client outcome.
Prod highlights all the key aspects of the governance, operational running and financial and regulatory history of the investment. It provides a clear insight into whether the investment does what it says on the tin.
The information will enable firms to identify inconsistencies and highlight warning signals regarding the product, such as large outflows and liquidity issues. Basically, it provides firms with a regular MOT to see the current health and status of any investment covered by the rules.
What does a Prod report need to do?
The first thing to do is to identify different groups of clients within your client bank. There are still lots of firms segmenting on the value of assets under management, which will make it almost impossible to undertake Prod properly.
Start to look at other characteristics, like life stages, whether there is a need for income, growth or both, or what people do for a living. You could even go as far as to profile their personality, as this influences their relationship with money.
Once you can clearly demonstrate who your clients are, you can show what they are each likely to need from a product. You can then build reports on the products following the structure below:
1.The manufacturer’s definition of the target market
– The type of client the product is targeted at – The type of financial needs and objectives of the client it is targeted at – The investment knowledge and experience of the client it is targeted at – The client’s capacity for loss and the ability to withstand this – The risk/reward profile of the product – Who the product is not suitable for
2. The product governance
– Fund manager details, length of service, etc – Leavers and when, stability of the team
3. The operation of the product
– Risk versus reward, volatility levels, max drawdown – Does it match up with what they say? – Does the performance meet the criteria they say it will?
4. Financial history
– Scale/size of the fund – History – Inflows versus outflows – Liquidity measure – Disproportionately large single holdings in the fund
5. Regulatory history
– Any reportable events/breaches
Hopefully, you can see why I think Prod has great potential. It will help manufacturers show the characteristics of their products clearly, so they won’t have the wrong clients going into them.
It will be great for advisers, as it means you don’t have to guess or hope that the product is appropriate for your clients.
But best of all, clients will probably never know Prod exists. It will be one of those things that goes on in the background ensuring they get the best outcomes.
Damian Davies is director of The Timebank