When a PROD in the right direction is required

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I heard a very interesting anecdote a couple of weeks ago about a large asset management (who will remain nameless) and their attitude to distribution. Asked what they did for their distributors in terms of supporting knowledge of their products they replied…  “We don’t know who our distributors are, most of our business comes through platforms, so we don’t even need business relationship managers anymore.”

Why did I find this interesting? Well, for a couple of reasons, firstly having come from an asset management background and having worked with rafts of salespeople, employed to cultivate the relationship with distributors, I wondered if they had all retired or been put out of work. Secondly, I wondered how the firm in question was demonstrating its understanding of the requirement of the PROD sourcebook, introduced at the same time as MiFID II.

I wondered how the firm in question was demonstrating its understanding of the requirement of the PROD sourcebook, introduced at the same time as MiFID II.

PROD is the FCA’s sourcebook “Product Intervention and Product Governance Sourcebook” and it outlines rules for manufacturers and distributors with the purpose of improving product oversight and governance. I like to think it is formulising the development, maintenance and distribution of products as it applied to products manufactured and distributed after 3rd January 2018 and distribution of existing products after this date.

I should point out it is only guidance for products such as AIF and UCITS but we all know guidance in the eyes of the regulator is there for a reason and deviation requires explanation.

For manufacturers PROD requires an audit of the product governance lifecycle and should demonstrate Board level accountability and oversight of that lifecycle i.e.;

  1. Idea generation
  2. Design
  3. Distribution Strategy
  4. Product Approval and Launch
  5. Marketing and distribution strategy
  6. On-going maintenance
  7. Maturity/Withdrawal from the market

(You may remember my piece early this year on the Value for Money Assessment which forms part of the Asset Management Market Review and for funds being distributed this is point number 6.)

One might wonder in which case how the asset management firm mentioned and as distanced as they freely admit they are from their distributors are going to, for example;

  • Show how the products objectives are likely to meet the needs of the end customer
  • Show the risk/reward profile is consistent
  • Show how the product is driven by the features that benefit the end customer
  • Show how the costs and charges are appropriate, transparent and unlikely to undermine return expectations

I expect they will say that they have manufactured products which are clearly “labelled” and priced accordingly, but how do you develop products aligned to customers needs if you are so distanced from them? The cynics amongst us might say they will only develop products they want to sell or think they can sell.  Same old, same old??

Where the onus of PROD may become tricky for them going forward is the expectation of oversight, which is now explicit rather than implicit. Have the Board evidenced in product design stage that;

  • The defined the investment objectives, policy, performance, risk targets, time horizon, liquidity, complexity and position within existing product/service range has been scrutinised and these are compatible with and transparent enough for the Target Market
  • All potential risks of the products have been identified and assessed
  • Sufficient scenario testing been performed? How may the product/service perform in a range of market conditions with the assessment of how customers be affected
  • An assessment of poor customer outcomes and the circumstances in which they occur has been preformed under both positive and negative conditions

Boards need to bring themselves up the curve on this and watch out for the planned supervisory visits after the AMMS is introduced in September 2019, there could be some difficult questions to answer.

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Through our award winning training and consultancy partnership FSTP LLP we hope to become a trusted provider of services to client firms across Financial Services. Specialties: Training and consultancy, project and interim management from regulatory issues through to management development and board services. Chartered Member of the Chartered Institute of Securities & Investment

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