Regulation  

Advisers warned about looming Prod probe

Advisers warned about looming Prod probe

Advisers have been urged to “fix the roof while the sun is shining” by focusing on regulation as the City-watchdog hints it could crack down on product governance rules.

Speaking at a Schroders breakfast briefing this morning (January 22), Mike Barrett, consulting director at the Lang Cat, said most advisers knew they were required to do something about the Prod rules but many were looking at it as a “tick box exercise”.

He said: “To do that is a little bit dangerous. It’s two years since the Prod rules came out and if you’re not complying with it, you’re in breach of the rules.

“The Financial Conduct Authority is looking at this and looking at the need to improve standards in the advice sector.”

Mr Barrett was referring to a Dear CEO letter published by the FCA yesterday (January 21) which urged advisers to ensure the advice provided was suitable, costs and charges were disclosed clearly and they acted in the best interest of their clients.

He said: “Advisers think ‘oh it’s all the bad guys and not us’ but issues within the letter about making sure services are appropriate and value for money and really understanding the approach — that’s Prod. These are the rules they are talking about.”

The FCA introduced the Europe-wide Prod rules in the UK in January 2018 in a bid to improve the industry’s product oversight and governance processes.

Prod aimed to tighten the rules around the design and sale of products to ensure they clearly meet the needs of their identifiable target markets, are only sold to those target markets and deliver appropriate outcomes.

Mr Barrett thought the rules could become a “useful regulatory stick” for the City-watchdog. 

He said: “They’re not going to ask specifically about your target market, but they could ask how you decided Woodford was appropriate for your target market. And if you can’t show them, that’s a rule breach.”

The Prod rules require advice firms to understand the financial products they distribute, assess the compatibility of such products with the clients while taking into account the provider’s target market and ensure the products are only sold when in the best interest of the clients.

According to the rules advisers must use information from providers and the data they have on their own clients to identify a target market and have procedures in place to ensure all rules are applied with.

Mr Barrett said there was a common misconception that Prod required advisers to segment their clients by assets, when instead they should ensure the particular services fit their clients' needs.

Advisers have previously been warned segmenting their clients by assets would mean it was “impossible” to be Prod compliant, but the Lang Cat found 40 per cent still split up consumers this way.

Around half used service levels to segment their clients while 45 per cent simply put clients into an accumulation or decumulation pot.