'Prod framework solid foundation for consumer duty reporting'

While the objectives of the legislation are all very well and good, meeting the criteria will be difficult without a standard format and language being used up and down the distribution chain.

Following the FCA’s latest update on May 10, entitled "Consumer Duty: Findings from our review of fair value frameworks", we know it will be important for firms to use their target market descriptors and segments to evidence fair value.

But how can that be presented in a format that everyone in the distribution chain understands without an orthodox reporting practice?

The answer to this could lie within some of the FCA’s own guidance where it makes reference to rules already commonplace in the wealth sector.

Using Prod as a framework 

The product intervention and product governance (Prod) sourcebook rules were introduced in 2018, although they were somewhat outshone by the Mifid II rules, which were introduced at the same time.

Both sets of rules were designed to make sure that solutions meet the needs of identifiable target markets, are distributed appropriately and deliver good customer outcomes. 

Advisers that gather the same six facts about their clients will find identifying tailored solutions much easier. 

They therefore provide a solid foundation for consumer duty reporting, hence the FCA suggesting that Prod is considered in consumer duty assessments and reporting. 

As a result of Prod, manufacturers of wealth products and services commonly state six key facts about their solutions:

1. The distribution channel it is designed for.
2. The types of clients it is designed for.
3. The needs and objectives it is designed to meet.
4. The knowledge/experience consumers should have. 
5. The risk(s) involved.
6. The time horizon involved.

Advisers that gather the same six facts about their clients will find identifying tailored solutions much easier. 

It also makes it harder to mis-sell a solution. If the client does not match the product's target market description, then clearly the product is not suitable for them.

These benefits are best unlocked when the questions are answered using prescribed options. This results in all parties in the distribution chain reporting the same facts on the same basis.

The good news for advisers is that the vast majority of manufacturers are already using the same Q&A set based on a European Mifid template.

Advisers who adopt the same template Q&A will find that they are able to categorise their clients using the same language.

To help advisers further, Defaqto has identified the key consumer Q&As.

Defaqto target market and client categorisation matrix

Benefits for advisers 

At Defaqto, we report manufacturers' answers to the Q&A in a comparable and selectable format on our research software, Engage. 

This will enable advisers and paraplanners using Engage to:

• Use their clients' answers as research criteria when selecting platforms, tax wrappers and investment solutions, helping with evidencing compatibility and suitability.
• Use their clients’ answers to segment their client bank and describe their target clients as well as aid them with the assessment and evidencing of three of the four consumer duty outcomes, namely:
  • Governance of products and services.
  • Price and value.
  • Consumer understanding.

Target market categorisation may not be a stated requirement of the consumer duty, but without it meeting the requirements will be challenging.

Manufacturers of regulated financial solutions are already using Prod rules. When advisers do the same, it can help make their proposition clearer and evidencing compliance with the duty easier.

Richard Hulbert is insight consultant at Defaqto