By Henry Cobbe, Head of Copia Capital Management, the investment solutions division of Novia Financial plc
Copia Capital kicked off 2020 with a series of seminars, meeting with advisers around the country as we endeavoured to explain, understand and interrogate the requirements under the Financial Conduct Authority‘s Product Intervention and Product Governance Sourcebook, or PROD as it has become known.
According to the regulator, the purpose of PROD is to improve firms’ product oversight and governance processes. As formally defined, MiFID II is the primary legislation setting the regulatory framework for product governance, with guidance from the European Securities and Markets Authority (ESMA) at EU level, with the “competent authority” responsible for the regulatory requirements at national level, in the UK’s case, the FCA Handbook.
You might want to think it of it as the “UK niece or nephew of MiFID II” as described by Mark Polson, founder of The Lang Cat, who we were lucky enough to have join us on the road, as he urged the advisers before him to sit up and take notice of it, if indeed they had not already.
To clarify, the rules under PROD do not dictate which investment proposition advisers should use, however it is clear that the requirement to articulate how they came to decide their choice for suitability, will lead a surge in the amount of governance administration asked of advisers going forward, in order to comply.
The rules state that good product governance should result in products that:
- meet the needs of one or more identifiable target markets;
- are sold to clients in the target markets by appropriate distribution channels; and
- deliver appropriate client outcomes.
The Lang Cat’s recent survey, in which they interviewed approximately 400 adviser firms, revealed that, to the question, ‘Do you run a suite of model portfolios?’, 7% said yes, on a discretionary basis, 37% said yes, on an advisory basis, and 15% said a combination of the two.
As PROD introduces even further governance requirements for centralised investment propositions (CIPs), understanding of suitability for end clients and identifying target markets – not just as defined by the adviser (or distributor, according to the language of PROD) but also of the manufacturer, down as far as fund (or financial instrument) level that is “sufficiently granular” – and, no great shock that determining what is deemed sufficiently granular is open to interpretation.
Polson had been predicting the use of third-party discretionary models to drop quite steeply in recent years but said he was yet to see evidence of that, and he also expected the decline of the use of advisory models, as things were getting harder, with even more dwindling of numbers in that camp once PROD and MiFID start to grip.
He said: “There is more and more involved in running portfolios, particularly on an advisory basis, and almost all of it is designed to help the client understand exactly what is going on and how much it costs before any action happens.”
This flies in the face of what many advisers want from their approach to portfolio management as although they want the a clearly defined proposition for clients, they also want to select an off-the-shelf offering and have it running in the background, freeing them up to concentrate on their client relationships, and constructing their financial plans.
But, as Polson said: “While it is doable, running the portfolios yourself is starting to be a big job [due to the additional governance under PROD], and I think the idea advisers can spend 90% of their time managing clients and 10% managing the money, is not going to be sustainable.”
Therefore, advisers need options. Some want to do the “proper” financial planning, while others want to still be involved in the investment decisions and have a voice. Copia offers adviser firms their “Toolkit” to help adviser insource sufficient capability for the professional risk management of their model portfolios. This insourcing approach is designed to help advisers meet their governance and oversight requirement according to their requirements and Polson said, he expected to see the advent of similar offerings launch as we move through this “interesting new world”.
One focus under PROD is that of client segmentation. With the vast majority of advisers still segmenting clients by portfolio size, Polson pointed to alternative approaches such as segmenting by need or life stage, which we at Copia would echo. The Lang Cat survey suggested that 10% of advisers had changed their approach to segmentation as a direct result of PROD, while 45% claimed it had influenced their thinking. A further 28% said they were already segmenting and 17% claimed to not segment their clients at all.
With the biggest group of adviser respondents – 45% – saying they were currently investing in off-the-shelf model portfolios on an advisory basis, there is clearly a large proportion of the adviser community who will be facing a huge administrative burden in the coming years as a result of the PROD rules. We are here to help advisers risk manage those strategies rather than seeing them outsource to a standard model from a traditional DFM.
11th February 2020
PROD & Productivity: Some Food for Advisers’ Thoughts
By Henry Cobbe, Head of Copia Capital Management, the investment solutions division of Novia Financial plc
Copia Capital kicked off 2020 with a series of seminars, meeting with advisers around the country as we endeavoured to explain, understand and interrogate the requirements under the Financial Conduct Authority‘s Product Intervention and Product Governance Sourcebook, or PROD as it has become known.
According to the regulator, the purpose of PROD is to improve firms’ product oversight and governance processes. As formally defined, MiFID II is the primary legislation setting the regulatory framework for product governance, with guidance from the European Securities and Markets Authority (ESMA) at EU level, with the “competent authority” responsible for the regulatory requirements at national level, in the UK’s case, the FCA Handbook.
You might want to think it of it as the “UK niece or nephew of MiFID II” as described by Mark Polson, founder of The Lang Cat, who we were lucky enough to have join us on the road, as he urged the advisers before him to sit up and take notice of it, if indeed they had not already.
To clarify, the rules under PROD do not dictate which investment proposition advisers should use, however it is clear that the requirement to articulate how they came to decide their choice for suitability, will lead a surge in the amount of governance administration asked of advisers going forward, in order to comply.
The rules state that good product governance should result in products that:
The Lang Cat’s recent survey, in which they interviewed approximately 400 adviser firms, revealed that, to the question, ‘Do you run a suite of model portfolios?’, 7% said yes, on a discretionary basis, 37% said yes, on an advisory basis, and 15% said a combination of the two.
As PROD introduces even further governance requirements for centralised investment propositions (CIPs), understanding of suitability for end clients and identifying target markets – not just as defined by the adviser (or distributor, according to the language of PROD) but also of the manufacturer, down as far as fund (or financial instrument) level that is “sufficiently granular” – and, no great shock that determining what is deemed sufficiently granular is open to interpretation.
Polson had been predicting the use of third-party discretionary models to drop quite steeply in recent years but said he was yet to see evidence of that, and he also expected the decline of the use of advisory models, as things were getting harder, with even more dwindling of numbers in that camp once PROD and MiFID start to grip.
He said: “There is more and more involved in running portfolios, particularly on an advisory basis, and almost all of it is designed to help the client understand exactly what is going on and how much it costs before any action happens.”
This flies in the face of what many advisers want from their approach to portfolio management as although they want the a clearly defined proposition for clients, they also want to select an off-the-shelf offering and have it running in the background, freeing them up to concentrate on their client relationships, and constructing their financial plans.
But, as Polson said: “While it is doable, running the portfolios yourself is starting to be a big job [due to the additional governance under PROD], and I think the idea advisers can spend 90% of their time managing clients and 10% managing the money, is not going to be sustainable.”
Therefore, advisers need options. Some want to do the “proper” financial planning, while others want to still be involved in the investment decisions and have a voice. Copia offers adviser firms their “Toolkit” to help adviser insource sufficient capability for the professional risk management of their model portfolios. This insourcing approach is designed to help advisers meet their governance and oversight requirement according to their requirements and Polson said, he expected to see the advent of similar offerings launch as we move through this “interesting new world”.
One focus under PROD is that of client segmentation. With the vast majority of advisers still segmenting clients by portfolio size, Polson pointed to alternative approaches such as segmenting by need or life stage, which we at Copia would echo. The Lang Cat survey suggested that 10% of advisers had changed their approach to segmentation as a direct result of PROD, while 45% claimed it had influenced their thinking. A further 28% said they were already segmenting and 17% claimed to not segment their clients at all.
With the biggest group of adviser respondents – 45% – saying they were currently investing in off-the-shelf model portfolios on an advisory basis, there is clearly a large proportion of the adviser community who will be facing a huge administrative burden in the coming years as a result of the PROD rules. We are here to help advisers risk manage those strategies rather than seeing them outsource to a standard model from a traditional DFM.