Using the PROD rules in practice

4 min read 31 Mar 20

The information contained in this page is for professional Financial Adviser use only.

PROD is a much talked about subject in financial services. But, in day-to-day reality, many firms are still grappling with it and what they need to do in practice. The first thing to stress is that PROD matters because the rules contained within it are exactly that, rules. And as a result, advisers who aren’t compliant are at risk of enforcement action.

On a more optimistic note, the majority of the PROD rules actually formalise or build on existing standards – particularly around segmentation - which most adviser firms have been following to a greater or lesser extent, for a number of years already.

Before we go any further, here’s a quick reminder of PROD’s purpose:

The PROD rules are designed to improve firms’ product oversight and governance processes (the systems and controls firms have in place to design, approve, market and manage products). And good governance, according to the PROD rules, should result in products that:

  • meet the needs of one or more identifiable target markets;
  • are sold to clients in the target markets by appropriate distribution channels; and
  • deliver appropriate client outcomes.

PROD in a nutshell: Target markets and segmentation

The parts of PROD that advisers need to pay closest attention to are those rules aimed at ‘distributors’– admittedly not the best adjective for advisers. In a nutshell, the rules for distributors are all about demonstrating a clear target market and distribution strategy for investment products or instruments.

Helpfully, the rules also outline a process for establishing a target market:

Manufacturer’s information

Advisers must get the necessary information from ‘manufacturers’ on whichever instruments or products they’re using, to make sure these meet the needs, characteristics and objectives of their target market.

Target market information

Having obtained this information from the manufacturer, advisers then need to determine the target market for the product or instrument, even if the target market hasn’t been defined by the manufacturer. Once the target market has been established, advisers also need to have a distribution strategy for the product, based on the information from the manufacturer and knowledge of their own clients.  

Product governance

Advisers must have necessary oversight and governance in place to ensure that the product or instruments continue to meet the requirements of their target market and distribution strategies.

Periodic reviews of the product governance arrangements are also necessary – covering the pre-sale research process, post-sale reviews and training – to ensure they remain fit for purpose. And last but not least, this ongoing governance needs to be carried out by the person responsible for compliance oversight within a firm.

Advisers are required to identify and assess the circumstances and needs of the clients that they intend to focus on, to ensure that these interests aren’t compromised as a result of commercial or funding pressures. This part of the process inevitably means that advisers will have to segment their client base – even if the rules don’t specifically state segmentation as a requirement.

And they must also identify any groups of clients whose needs, characteristics and objectives aren’t compatible with the instrument or investment service. This concept of ‘negative suitability’ is a new departure for the regulator which prompts advisers to really focus in on exactly what each element of their client proposition actually means.

Good practice tips

We recently ran a webinar with Paraplanner Powwow and lang cat’s Mike Barrett on this topic. We’ve pulled together some more information and checklists to help you analyse your existing client book and inform your discussions on serviceable target markets of the future.

Head to the our Paraplanner Powwow page to find out more