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PROD: The rules you can’t ignore

  • By Jason Stockwell

Abbie Knight highlights why product governance rules introduced under MiFID II are so important for advisers


The title of Bob Dylan’s 1964 hit “the times they are a-changin” may strike a chord with financial advisers across the UK, who are in the midst of reassessing the investment propositions they have selected for clients.

Why? It’s all down to the Product Intervention and Product Governance Sourcebook (PROD), which quietly came into force with MiFID II in January 2018. These new rules require advisers to evaluate each component in the value chain to ensure the cost, service and investment proposition they are recommending are appropriate for each client segment.

PROD is a game changer and many advisers will need to radically alter the way they segment their clients; long gone are the days of simply dividing a client-bank according to portfolio size.

Although many advisers still base their fee model and proposition on the underlying client’s investable assets, if this is the only measure considered – the FCA will take issue. Life stages and the varying requirements throughout these stages must also be taken into account.

Research from the lang cat shows that more than 90% of advice firms now offer a Centralised Investment Proposition (CIP) and tend to have more than 80% of new money flowing into this. This raises alarm bells for the regulator, given that the investment proposition needs to be broad enough to cover a wide range of outcomes and ensure individual client suitability.

Under PROD, the adviser must demonstrate to the regulator that they have developed a thorough understanding of the client’s needs and objectives and have offered an advice service, platform (if applicable) and investment proposition (be it managed, unitised or bespoke) to meet their needs. What the regulator does not want to see is that the client has simply been shoe-horned into a ‘one-size-fits-all’ centralised investment proposition (CIP).

To Be Or Not To Be (On Platform)?

If the adviser concludes that a managed portfolio service (MPS) is the most appropriate route for the underlying client, they will need to consider whether it is better to access the proposition on or off-platform as part of the PROD assessment.

Here Are Some Of The Key Considerations:

  • Is it appropriate for a specific segment of your client base to pay a separate platform charge? Are you comfortable with the charge itself?
  • What type of agreement would you like to have in place between you, the client, the DFM and potentially the external platform?
  • If you access an MPS off-platform, are you comfortable with the strength of the DFM’s systems and processes?
  • Does the external or DFM platform offer sufficient scope in terms of the investments it can administer?
  • If you invest in an MPS off-platform, are you comfortable that the client could be contacted directly by the DFM?

Here’s A Helpful Table Outlining Some Of The Key Features Of Both:

The Potential Benefits

It’s important to note that MPSs offered by discretionary fund managers (DFMs) can vary in their nature and there is no standard industry offering. Nevertheless, the table below outlines the potential benefits associated with both:

The table indicates that in some instances an off-platform MPS could provide a better solution for the client if it ultimately lowers costs and gives the investment manager the freedom to access a broader range of investments, as well as the flexibility to tailor models. Of course, much will depend on the individual client’s circumstances and the strength of the DFM’s internal systems and processes.

It goes to show that PROD has not only shone the spotlight on whether advisers have selected the right investment proposition for the client but also how this is executed, as this can make a difference to the outcome.

PROD has not only shone the spotlight on whether advisers have selected the right investment proposition for the client but also how this is executed

Finding The Right Path

The world is changing and it’s important for advisers to keep up. In the post-PROD environment, the starting point has to be the client.

Advisers must develop an understanding of what heir needs are and outline how different investment propositions could work for them. They will then need to explain why they have selected the investment proposition and how they have decided to execute this. It is then a case of monitoring these selections and ensuring they remain relevant to the client’s circumstances.

If you haven’t started to think about PROD, I would start by taking time to segment your client bank by life stages and/or needs, then map out how different investment propositions could best meet these objectives. Most of all, don’t forget to consider the logistics behind executing these plans – on platform or off.


Abbie Knight

Director of DISCUS and Head of Digital at the Embark Group.

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