How much do you know about the Product Intervention and Product Governance Sourcebook – known as ‘PROD’ for short? If your response is ‘very little’, then you are by no means alone. 

Not long ago, research from consultancy the lang cat found almost three fifths (58%) of advisers remained unaware of this piece of legislation, which has actually been in force for over a year now. This statistic is particularly frightening because PROD has the potential to change radically the way most advisers run their centralised investment propositions (CIPs). 

If that is not enough to grab your attention, PROD also stands alone as a piece of legislation that gives the regulator teeth – the Financial Conduct Authority (FCA) can take enforcement action against firms that do not comply. 

As indicated at the start, PROD is shorthand for the Product Intervention and Product Governance Sourcebook, which quietly came into force alongside the second iteration of the Markets in Financial Instruments Directive (MiFID II) in January 2018.

PROD was established by the FCA to implement the product guidance requirements of MiFID II. Put simply, it requires advisers and providers to evaluate each component in the value chain to ensure the cost and service is appropriate for the intended client segment.

A key objective of PROD is to improve product oversight and governance processes at firms, ensuring the systems and controls they have in place to design, market and manage financial products are robust and meet legal and regulatory requirements.

Speaking at the PA360 North conference run by Multi-Asset Review’s sister title Professional Adviser last  October, however, Rory Percival, a former technical specialist at the FCA who now runs a training and consultancy business, estimated fewer than 1% of financial advice firms were complying with PROD rules.

So what does this all mean for your business’s CIP? According to the lang cat, more than 90% of advice firms run a CIP and, of those firms, around 80% of new money tends to flow into their CIP. In the aftermath of the Retail Distribution Review, this should come as no surprise.

CIPs were introduced to ensure consistent client outcomes across different risk grades – for example, you might see two medium-risk investors advised by the same firm but by different advisers offered the same model portfolio. This approach would demonstrate the customers were being treated fairly.  

The challenge associated with running a CIP is that it can give rise to ‘shoe-horning’ – a term coined by the FCA in its 2012 paper on CIPs, where it raised concerns about clients being put into ‘one size fits all’ investment solutions.

Research from FE indicates 31% of advisers intend to put nearly all (90%) of their clients’ investments into a single investment proposition, which creates concentration risk and the potential for shoe-horning.

In contrast, PROD provides advisers with a framework to consider their advice process and ensure value for money for each element. The advice service, investment solution, asset management style, product and/or platform must be assessed and the adviser needs to evidence a truly client-centric offering.

The FCA often talks about ‘keeping the client at the heart of the decision-making process’ – and PROD sets out the specific steps firms must take to put this into practice.

Client segmentation

The first step is to think about how you categorise your client base. Over time, segmentation has become more sophisticated and should no longer purely be based on investable assets. That still forms the basis for the fees many advisers charge, however, and the proposition they select for clients.

Clients with sub-£100,000, for example, are typically offered multi-asset funds and those with £100,000 to £500,000 are placed into model portfolios while those with in excess of £500,000 may be offered bespoke discretionary portfolios. 

Asset size cannot be the only measure for determining CIP suitability. While still a factor, life stages and the varying requirements throughout these stages must also be taken into consideration.

The investment solution offered must be broad enough to cover a range of clients, while also ensuring individual suitability. In this context, breadth could relate to providing various investment strategies, such as active, passive, absolute return and income. Meanwhile, solutions can be packaged for clients in a variety of ways – for example as funds, model portfolios on platforms or direct, and bespoke portfolios.   

Advisers who currently group clients based on assets under management and charge ad valorem fees to determine the service level – such as the number of face-to-face meetings or reports a client is entitled to each year – will need to rethink their approach.

PROD requires a clear definition of segments and sub-segments, based on client characteristics and needs. These must then be matched to a platform, investment solution and advice service. At a DISCUS event on this topic, Percival provided several examples of segmentation under PROD and the following table offers a great starting point (the gaps should get you thinking about your own client segments).

Following PROD, it is highly likely advice firms will deploy a service proposition that comprises of three platforms, three centralised investment and/or retirement propositions and two or three advice services.

We will see firms move away from using a range of solutions in all areas towards a very tight, segmented service offering, with each component in the value chain evaluated to ensure the cost and service are appropriate for the intended end-client.

This, surely, should be a marketeer’s dream! Honing your value proposition to showcase how your service addresses the specific needs of client segments will allow you to use a ‘sniper rifle focus’ in your marketing. 

As providers, those who choose to partner with you will know exactly why they are using your service. They will also be able to articulate clearly your offering to their clients, thereby increasing engagement.It is never a bad thing to take a step back and look at your proposition with fresh eyes – and PROD provides advisers with an opportunity to do just this. You may find there is work to be done but, ultimately, this piece of regulation should be positive for both your business and the underlying client.

Don’t put off looking at PROD any longer, it is time to embrace it.

This article was written by Abbie Knight, Director of DISCUS and first appeared in Multi-Asset Review and Professional Adviser.