In the push to get ready for Mifid II, a lot of adviser firms seem to have overlooked another piece of legislation that was passed around the same time that could become a priority for the UK regulator this year.
While Mifid II aims to improve protections for investors, the Product Intervention and Product Governance Sourcebook (known as Prod) regulates the suitability of products advisers recommend to their clients.
Under this set of rules, advisers need to evidence two key things:
- that they understand the product they are recommending; and,
- that it is suitable for their client’s needs.
To get a better understanding of the Prod requirements, International Adviser reached out to John Lester, director of business development at investment consulting and research firm Square Mile, who has been on a roadshow to raise industry awareness.
Suitability will take priority
“At the top of the agenda for the Financial Conduct Authority (FCA) for quite some time now there’s been suitability, and the whole suitability process, and it’s all about delivering better outcomes for investors,” Lester told IA.
“Prod is really all about ensuring that products are designed and manufactured to deliver specific outcomes that meet specific client needs, and then the distributer, or the financial adviser, appropriately segmenting their client base, not on business minds but on outcomes and client needs, and ensuring that they have done their due diligence on the manufactured products to ensure that the product that they’re making available to their client is designed to meet that client’s needs.”
Throughout his roadshow Lester said that very few advisers were aware of the scope of Prod and that a large percentage were not sure about what the legislation was really about.
How does it differ from best practice?
The concepts and rules set out in Prod can be viewed as simply good practices that most advisers might be already be doing, but there is a regulatory catch – evidence.
“Documenting your entire suitability process is more important than ever before; because, in the eyes of the regulator, if it’s not documented how do you prove it?” Lester added.
“So, the only way that you prove good business practice is by making sure that is effectively documented.
“For many firms this shouldn’t be a massive change to the way in which they’re doing business. It’s just about ensuring that they are clearly evidencing that the client-needs segmentation has been clearly done and that they have identified all the products that have been manufactured to meet those specific needs.”
Document every step of the way
However, Lester told IA, it is not only the client suitability that needs to be documented.
It is also about proving that advisers have identified the right products to recommend to their clients. And that needs to be documented as well.
“[The evidence needs to show the consideration taken with] the products that they use to meet their clients’ needs on a pre-sale basis, and then on a post-sale basis to ensure that the product continues to meet the needs of the client.
“You would also need to demonstrate what kind of clients a specific product would not be suitable for, and you have to clearly document that as well,” Lester added.
Additionally, any member of staff in a firm who is involved in providing products needs to undergo training, “and there needs to be clear documentary evidence that everyone in the business is fully trained and competent on the products”.
What is the point then?
Lester said that “what Prod seems to be doing is just tightening up on [all previous guidance and legislation] and make sure that you can evidence this”.
But advisers would be foolish to think that it is not a priority.
That is because, according to Lester, “[Prod] hasn’t actually been pursued because of everything else that has been going on and all the other requirements that advisers had to get over the line, but 2019 seems like a pretty good year [for the FCA] to ensure at least financial advisers have got the processes in place to demonstrate suitability”.