PROD is the new Cilla

by Damian Davies on 20·06·2019

PROD is the new Cilla

PROD[1] is a big deal. 

Actually, scrub that. 

PROD is a VERY big deal.

It has been interesting for me to deliver a few sessions on PROD over the last 12 months as it is clear most people are aware of PROD, but few know the nitty gritty and even fewer have done anything about it.

It’s not a surprise, to be honest, and don’t beat yourself up if you’re not PROD ready – there has been quite a lot going on since January 2018.

I think the regulator has accepted this and been relatively low key on PROD to date.  I can see this changing quite a bit over the next 12 months, however, purely because they can see the beneficial impact of PROD is massive.

Some will inevitably feel it is just more pointless regulations thought up by a regulator with too much time on their hands, designed to make an everyone’s life even harder. 

The truth, however, is that PROD is going to make everyone’s life better.  That includes the providers, the advisers and most importantly the clients.

What is PROD?

One of the accusations sometimes levelled at the regulator is that they don’t tell advisers what to do, they just give them enough rope to hang themselves with. 

This is because the regulator is a guidance driven organisation.  They outline best practice and we have to work out the best way to apply the guidance to our firms.

Well, in this case PROD is a rule, so it is

a)       very clear

and

b)       not optional!

The PROD rules were introduced by the FCA on the 3rd January 2018.  You can see it here: https://www.handbook.fca.org.uk/handbook/PROD/1/?view=chapter

In brief, The PROD rules affect two groups:

• Product Manufacturers (who we usually refer to as providers)

and

• Product Distributors (advisers and planners). 

The aim is to ensure different types of clients are being exposed to appropriate types of product.  So, the manufacturers outline what type of client characteristics their product is designed for and the advisers have a clear outline of the characteristics for the clients they deliver their service to.

So, PROD is a matchmaking service.  PROD is basically Cilla Black.

PROD is also a bit like the ingredients list on a tin. 

It ensures that when the product manufacturers say you are buying a tin of plain baked beans, you don’t end up with a tin of exotic fruit cocktail.

This is essential for firms in mitigating risk to your clients and maximising the chances of the correct client outcomes. It also helps reduce the financial and PI risk to the business.

Armed with this information, firms can make objective decisions on whether to buy, hold or sell investments and decide if they are still they appropriate for any given client segments within a CIP.

It is a great tool to use in efficiently implementing MiFID II interim suitability assessments too.

It takes a lot of time, effort and resource to track down and analyse all this information from the manufacturers and other independent sources to arrive at an objective overview of an investment.

If PROD had been around in the past, however, I feel comfortable that a lot of the issues of mis selling or situations like ARCH-CRU just wouldn’t have happened.

How does PROD work?

As Distributors of products, for Firms operating Centralised Investment Propositions in particular, it is imperative that sufficient due diligence is carried out on the underlying investments with the actual providers to demonstrate that the investments being recommended are recommended to the correct target market and are designed to operate in a manner that produces the correct outcome.

All firms will currently conduct product research to compare what is in the market place based on factors such as cost and functionality.

This primarily covers the aspects of 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 etc.

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, it is difficult to produce the evidence that demonstrates the investment is designed for the target market it is being recommended to and is also being run and operated in a manner that is likely to produce the correct client outcome.

PROD will highlight all the key aspects of the governance, operational running and financial and regulatory history of the investment.

It will provide a clear insight into whether the investment does indeed do 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 will provide Firms and advisors with a regular MOT to see the current health and status of any investment covered by the new PROD 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.

This is a great opportunity to review how you segment clients, as there are still lots of firms segmenting on the value of assets under management.

This 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 or growth or both, what people do for a living.  You could even go as far as to profile their personality as this strongly 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 PROD reports on the products following the structure below:

Contents:

1.The manufacturers definition of the target market to include:
- The type of client who the product is targeted at
- The type of financial needs and objectives of the clients and market it is targeted at
- The investment knowledge and experience of the client it is targeted at
- The clients 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 v 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 v Outflows
Liquidity measure
Disproportionately large single holdings in the fund.

5. Regulatory History
Any reportable events / breaches

Summary

Hopefully, you can see why I think PROD is a bit of a big deal.  Most importantly, you can see why I think it has a great potential for good outcomes.

It will help manufacturers show the characteristics of their products clearly, so they won’t have the wrong clients going into the,

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.

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.