If you were to ask advisers to list the causes of their biggest headaches, regulation would likely feature near the top. While the need to provide consumers with sufficient protection from either rogue or negligent practices is undeniably essential, the resulting red tape can put a strain on time and costs.
Mifid II, which came into force on January 3 2018, is a case in point. Its most notable requirement, for advisers to contact any clients whose portfolios suffer a drop of 10 per cent or more since the last reporting period, has increased administrative workloads. But recently other requirements introduced as part of the Mifid II package are starting attract greater attention – particularly the implementation of the Financial Conduct Authority’s Product Intervention and Product Governance Sourcebook rules.
Prod, as it is known, aims to “improve firms’ product oversight and governance processes, and to set out the FCA’s statement of policy on making temporary product intervention rules,” according to the regulator.
It adds: “Product oversight and governance refers to the systems and controls firms have in place to design, approve, market and manage products throughout the products’ life cycle to ensure they meet legal and regulatory requirements.”
A key aspect of this regulation is that advisers must assess how compatible products are with the needs of their clients. Most have concluded that this means clients need to be segmented into certain categories so that they can be targeted appropriately. Box 1 outlines the relevant section of the FCA handbook. But advisers’ interpretation of the requirements has drawn criticism.
Last year, former FCA technical director Rory Percival said that segmenting clients by asset values – still common practice among advisers – is in the interests of firms rather than their clients, and added he also had concerns around the use of centralised investment propositions.
Mr Percival’s research found that fewer than 1 per cent of advisers were complying with the Prod requirements; he also warned that the FCA was likely to increase its focus on the issue during 2019.
The regulator’s recent decision to revisit the merits of both the retail distribution review and financial advice markets review will provide it with the optimum opportunity to do so. But it could act even sooner, given the results of that exercise are not due until 2020.
“Advisers need to ensure they can demonstrate to the regulator that they have clearly segmented their client base by their clients’ needs – not by service level provided, as many did post-RDR – and that the investment solutions they have identified to meet those needs have outcomes specifically designed by the manufacturers for that purpose,” says John Lester, business development director at Square Mile.
“Examples of need segmentation could include capital accumulation, capital protection, inflation protection or income provision. Every solution utilised by the adviser firm needs to be reviewed regularly to ensure its outcome continues to meet the need of the intended client, and this process needs to be clearly documented,” he adds.
Martin Bamford, chartered financial planner at Informed Choice, anticipates some companies will struggle with the rules more than others. He says: “Restricted advisers and those who form part of a vertically integrated business will need to work a lot harder to satisfy the rules. If you’re essentially all about selling products, then you need to take real care to ensure those products, and your proposition, are designed with your clients in mind.