Ryan Medlock: So, I think it’s fair to say that when MiFID II first came into effect over eighteen months ago it slipped under the radar a little bit, but make no mistake about it, it is having a massive impact on the industry, including the drawdown market. I think if we go back to just before MiFID II came in, there was a lot of background noise about advisors having to obtain legal entity identifiers, recording client phone calls, but what we’ve actually seen is more pertinent issues rise to the fore. So, things like the 10% drop reporting, changes to the suitability rules, the introduction of the new PROD rules, and indeed the cost and charges disclosure requirements. So, the Product Governance Requirements, or PROD in short, is another significant impact of MiFID II.
It’s important to remember that PROD applies to both MiFID II and IDD business, so it casts a much wider net than, say, the cost and charges disclosure requirement does. Now, this is a new part of the FCA handbook, and as such, these are rules. If you aren’t complying with these rules, you are at risk of enforcement action. Now, whereas MiFID II was more focused on the increasing transparency, PROD is more about the target market and client segmentation strategies. I think since the introduction of the retail distribution review back in 2012, we’ve seen lots of really, really good examples of client segmentation strategies.
Now, traditionally, that’s centred on two key demographics, age and wealth. In a post-PROD environment, I think that’s unlikely to go far enough because I think the regulator is likely to view those as being more firm-centric methods. I think, remember, PROD is all about the customer, it’s about starting with the customer first and then building a proposition upwards and I think over the last eighteen months, we are starting to see the emergence of more client-centric segmentation methods. So, perhaps the most obvious and easiest way to segment on this basis is perhaps segmenting by financial life stages, but I’ve also spoken to advisors as well who’ve started segmenting their client bank by occupation.
The key message here is to, ultimately, not overthink or overcomplicate any of this. There are no hard rules in how you go about segmenting. It really does need to specific to your client bank, and it needs to be in a client-centric manner. Now, I think this presents a really, really good excuse to review and tidy up your client bank, especially for drawdown investors. We know the drawdown market remains incredibly immature and there are many different types of drawdown investors. I think by segmenting and sub-segmenting, you can really drill down into the needs of your different target markets.