As we approach the 15th month since product governance (PROD) was introduced, there are still a vast number of firms that have their heads in the sand – either confused, unclear or hoping it will all go away!
So, for those who fall into the category above, it’s time to give you a little PROD! (Excuse the pun).
The Product Governance requirements of MiFID II is to aim to ensure that manufactures and distributers of financial instruments (“Products”) are both acting in the best interests of investors, at all stages of a Product’s development and distribution life-cycle.
However, PROD recognises that manufacturers may not have a direct relationship with the end client or have first-hand information on the client in order to evaluate the clients’ needs and characteristics. So, manufacturers need to assess suitability on the product 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.
Therefore, PROD was created to help the Distributors and Manufactures communicate, to ensure they are both offering and providing the correct “Product” to meet the 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 are now challenging firms to evidence their process or face a regulatory breach if this is not available, (ok, panic a little bit!).
The process is not as complex as you may think, firms should have already started to look at segmenting clients and PROD will expand on this. The further segmentation will split this down into choices of investment solution, platform selection, advice service and also client identification.
Your first task of segmenting your clients will be to identify your client by type. This should not be purely based on their assets. Clients with the same amount of assets can be in different stages of their life. The segmenting 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!
Good things to segment your client bank on:
Life Stage is probably the most popular option and the easiest to address, but if you have a specialised client bank this could also include:
Once you have identified the client type, it will often be helpful to split this into a sub section. For each segment, you could have two or more options which you feel would help you identify the most suitable client. This could be via the client investment level, i.e. Basic investor, Informed investor, or Advanced investor, or / and by client type, first job, newly married, young couples.
This section will indicate the style of investment that would be chosen for the client, i.e. Discretionary managed portfolio, Passive portfolio, CRP, or Investment bonds, etc … (you get the idea!).
Don’t over complicate this section – there is no need to have a multitude of platforms with each one addressing a specific need. You may find that it is possible that one platform can meet the needs of all a firm’s clients. This could be if the client bank is very simple 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, it still needs to evidence that it can meet the client’s overall needs.
If you genuinely only deal with retired deep-sea divers, who take no more than 4% a year from their drawdown plan and have other secure income – then it is absolutely fine to have a CRP, and a single platform, and a single service proposition. You do not need to create additional stuff for no reason.
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 levels available to meet the appropriate need. This could include a Lite Service, Full service, Decumulation service, or No service, etc…
We do understand that anomalies will occur, but we hope that you will have a good research process in place to be able to review the market and find an appropriate solution. So, should you come across a client where your default option isn’t suitable, you will not need to ‘shoe horn’ a client to make it fit.
For the visual people amongst us, this is a simple chart that Rory Percival has suggested and we think that this is a great start:
|Life Stage||Sub Segment||Investment Solution||Platform||Service requirements|
|Young family||Basic investor||Passive, fund of funds||Platform A||Lite Service|
|Informed investor||Discretional Service||Platform B||Full Service|
|Retired||Basic investor||Income||Platform A||…..|
|Informed investor||Bespoke / CRP||Platform B||…..|
|Advanced Investor||Bespoke / CRP||Platform B|
Credit: Rory Percival
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.