The impact of MiFID II and PRIIPs is still being felt by all in the financial services industry. From manufacturers and their interpretation of cost and charges disclosure, to advisers grappling with target market and client segmentation. Nathan John, Investment Marketing Manager, looks at the ways regulation is driving change and how this will play out over the next 12-18 months.
The existing discussion
I was taught there are the certain rules you should always follow when writing: know your audience, know your topic, and keep it simple. However, it seems there is an additional rule when writing about UK financial regulation of which I was previously unaware: the obligatory ‘KID/KIID’ related pun.
It may be the fondness for these puns when industry experts have been debating whether the ‘KIIDs are alright’, or if the ‘meddling KIIDs’ have prevented fund managers from ‘getting away with it’, that has resulted in a key impact of the new regulation not getting anywhere near as much focus as it warrants. So, rather than add to the storm in a teacup around fund charge disclosure, I’ll try to focus on another piece of new regulation that I think will have a greater long-term impact on adviser processes and propositions – PROD and target market. Also, as my knowledge of pop music in the 1960s and Hanna-Barbera cartoons is somewhat limited compared to many of my peers, I’ll avoid the puns.
Focusing on what matters
The new regulation around target market will underpin the whole of MiFID II and reshape the way centralised investment propositions are built. The key point is the introduction of a new sourcebook introduced by the FCA, the Product Intervention and Product Governance Sourcebook (PROD). PROD brings the development of centralised investment propositions under the regulatory spotlight and will ensure that they have been built with the client in mind from the very beginning.
PROD will mean that advisers could need to look at their clients in a different light. Are they savers? Do they have income requirements? Is capital preservation their main aim? This analysis of their client bank and the appropriate segmentation could result in a client matrix divided by the different requirements of their clients.
The right product for the right clients
When reviewing your clients, you will need to look at their wants and needs. For example, clients who are savers will need products and services that are designed for accumulating wealth and the success of this proposition could be measured against an equity type benchmark.
Likewise, you may have clients who are saving for retirement, but no longer investing large amounts. These clients would be very concerned with wealth preservation and so any proposition would need to keep their capital in line with inflation and could have an inflation-based benchmark.
Thirdly, you could have clients in decumulation that would again need a different set of products and services that are designed with their needs and aspirations. Again, they would need a different benchmark related to not just income they are taking, but also inflation.
So, you could end up with a matrix of three different columns, containing three distinct client segments: wealth accumulators, wealth preservers, and those clients in decumulation.
The next steps
The introduction of PROD effectively makes client segmentation and target market a ‘rule’ and is consistent with the FCA’s stated objective of ensuring the interests of consumers are at the heart of everything. I don’t believe the regulator expects that advisers will have all of this finalised, but there is an expectation that there is a plan in place for the next 12-18 months to change the way client service propositions are designed. To kick this off, any process should start with an analysis of your existing clients.
To find out how we can help you address this regulatory change within your business please speak to your Old Mutual Wealth consultant.