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PROD 1.1 Application and purpose

Purpose

PROD 1.1.1 G

1The purpose of PROD is to improve firms’ product oversight and governance processes and to set out the FCA’s statement of policy on making temporary product intervention rules.

PROD 1.1.2 G

Product oversight and governance refers to the systems and controls firms have in place to design, approve, market and manage products throughout the products’ lifecycle to ensure they meet legal and regulatory requirements.

PROD 1.1.3 G

Good product governance should result in products that:

  1. (1)

    meet the needs of one or more identifiable target markets;

  2. (2)

    are sold to clients in the target markets by appropriate distribution channels; and

  3. (3)

    deliver appropriate client outcomes.

PROD 1.2 Application of PROD 2

PROD 1.2.1 R

1 PROD 2 sets out the FCA’s approach to issuing temporary product intervention rules. It is of relevance to all firms.

PROD 1.3 Application of PROD 3

General: Who? What?

PROD 1.3.1 R

1 PROD 3 applies to

  1. (1)

    a MiFID investment firm;

  2. (2)

    a CRD credit institution;

  3. (3)

    a MiFID optional exemption firm; and

  4. (4)

    branches of third country investment firms; with respect to:

  5. (5)

    manufacturing financial instruments and structured deposits; and

  6. (6)

    distributing financial instruments, structured deposits and investment services.

[Note: articles 1(3), 1(4), 16(3), 24(2) and 41(2) of MiFID]

Other firms manufacturing or distributing financial instruments or structured deposits

PROD 1.3.2 R

Other firms which manufacture or distribute financial instruments or structured deposits should take account of PROD 3 as if it were guidance on the Principles and other relevant rules and as if “should” appeared in PROD 3 rules instead of “must”.

Eligible counterparty business

PROD 1.3.3 R

PROD 3.3.1R does not apply to eligible counterparty business.

[Note: article 30(1) of MiFID]

Where?

PROD 1.3.4 R

PROD 3 applies to a firm with respect to activities carried on from an establishment maintained by it, or its appointed representative, in the United Kingdom.

PROD 1.3.5 R
  1. (1)

    PROD 3 also applies to a firm with respect to activities from an establishment overseas with a client in the United Kingdom.

  2. (2)

    But PROD 3 does not apply to those activities if the office from which the activity is carried on were a separate person and the activity:

    1. (a)

      would fall within the overseas persons exclusions in article 72 of the Regulated Activities Order; or

    2. (b)

      would not be regarded as being carried on in the United Kingdom.

EEA territorial scope rule: compatibility with European law

PROD 1.3.6 R
  1. (1)

    The territorial scope of this sourcebook is modified to the extent necessary to be compatible with European law (see PROD 1.3.7G to PROD 1.3.10G for guidance on this).

  2. (2)

    This rule overrides every other rule in this sourcebook.

Effects of the EEA territorial scope rule

PROD 1.3.7 G

One of the effects of PROD 1.3.6R is to override the application of this sourcebook to the overseas establishments of EEA firms in circumstances covered by MiFID.

PROD 1.3.8 G

The guidance in this chapter provides a general overview only and is not comprehensive.

PROD 1.3.9 G

When considering the impact of a directive on the territorial application of a rule, a firm will first need to consider whether the relevant situation involves a non-UK element. PROD 1.3.6R is unlikely to apply if a UK firm is doing business in a UK establishment for a client located in the United Kingdom in relation to a UK product, in other words PROD 3 will apply to the UK firm. However, if there is a non-UK element, the firm should consider whether:

  1. (1)

    it is subject to the directive (in general, directives only apply to UK firms and EEA firms, but the implementing provisions may not treat non-EEA firms more favourably than EEA firms);

  2. (2)

    the business it is performing is subject to the directive; and

  3. (3)

    the particular rule is within the scope of the directive.

If the answer to all three questions is ‘yes’, PROD 1.3.6R may change the application of the rules in this sourcebook.

PROD 1.3.10 G

When considering a particular situation, a firm should also consider whether two or more directives apply.

MiFID: effect on territorial scope

PROD 1.3.11 G

PERG 13 contains general guidance on the persons and businesses to which MiFID applies.

PROD 1.3.12 G

For a UKMiFID investment firm, rules in this sourcebook that are within the scope of MiFID generally apply to its MiFID business carried on from an establishment in the United Kingdom. They also generally apply to its MiFID business carried on from an establishment in another EEA State, although in the case of rules that implement article 24(2) MiFID only where that business is not carried on within the territory of that EEA State. Where a MiFID investment firm carries on MiFID business from a branch in another EEA State, organisational requirements, including rules implementing product manufacture obligations under article 16 MiFID are home state requirements and therefore FCA responsibility (see SUP 13A Annex 1G).

[Note: see articles 34(1) and 35(1) and (8) of MiFID]

PROD 1.3.13 G

For an EEA MiFID investment firm, rules in this sourcebook that are within the scope of MiFID generally apply only to its MiFID business if that business is carried on from an establishment in, and within the territory of, the United Kingdom and only to the extent that the rules implement article 24(2) of MiFID.

[Note: see articles 35(1) and (8) of MiFID]

Electronic Commerce Directive: effect on territorial scope

PROD 1.3.14 G

The guidance on the Electronic Commerce Directive in COBS 1 Annex 1, Part 3, paragraph 7 applies equally in relation to the rules in PROD 3.

Interaction of PROD 3 and the RPPD Guide

PROD 1.3.15 G

A firm to which PROD 3 applies need not apply the guidance in RPPD for matters covered by PROD if the firm has complied with PROD 3.

PROD 1.4 Application of PROD 4

PROD 1.4.1 R

1 PROD 4 applies to:

  1. (1)

    an insurance intermediary; and

  2. (2)

    an insurer,

with respect to:

  1. (3)

    manufacturing insurance products; and

  2. (4)

    distributing insurance products.

[Note: articles 1(2) and 25 of the IDD]

PROD 1.4.2 G

1In PROD an insurance product may be read as being a reference to the product for distribution to customers generally and is not intended to refer to each individual contract of insurance being sold or underwritten (unless the context indicates otherwise).

PROD 1.4.3 R

1 PROD 4 does not apply in relation to the manufacturing or distributing of:

  1. (1)

    a contract of large risks, or

  2. (2)

    a reinsurance contract.

[Note: article 25(4) of the IDD]

When an intermediary may be considered to be manufacturing

PROD 1.4.4 EU
  1. 13(1) For the purposes of Article 25(1) of Directive (EU) 2016/97, insurance intermediaries shall be considered manufacturers where an overall analysis of their activity shows that they have a decision-making role in designing and developing an insurance product for the market.

    3(2) A decision-making role shall be assumed, in particular, where insurance intermediaries autonomously determine the essential features and main elements of an insurance product, including its coverage, price, costs, risk, target market and compensation and guarantee rights, which are not substantially modified by the insurance undertaking providing coverage for the insurance product.

    3(3) Personalisation of and adaptation of existing insurance products in the context of insurance distribution activities for individual customers, as well as the design of tailor-made contracts at the request of a single customer, shall not be considered manufacturing.

[Note: article 3 of the IDD POG Regulation]

PROD 1.4.5 G

1The effect of PROD 1.4.3EU and PROD 1.4.6R is that an insurance intermediary needs to consider if it is manufacturing an insurance product and, if so, should comply with PROD 4.2 (Manufacture of insurance products).

Effect of provisions marked “EU”

PROD 1.4.6 R
  1. (1)

    1Subject to (2) and PROD 1.4.3R, provisions in this section and in PROD 4 marked “EU” apply to firms manufacturing or distributing insurance products, but to whom the IDD POG Regulation does not apply, as if they were rules.

  2. (2)

    For the purposes of (1), a word or phrase used in the IDD POG Regulation and referred to in column (A) has the meaning indicated in Column (B) of the table below:

    (a)

    (b)

    “Article 17(1) of Directive (EU) 2016/97”

    ICOBS 2.5.-1R, in relation to a non-investment insurance contract, or COBS 2.1.1R, in relation to a life policy

    “Article 25(1) of Directive (EU) 2016/97”

    PROD 4.2.1R and PROD 4.2.2R

    “Article 8(2)”

    PROD 4.2.30EU

    “competent authorities”

    FCA

    “customer” and “potential customer”

    customer

    “Directive (EU) 2016/97”

    IDD

    “insurance-based investment products”

    insurance-based investment products

    “insurance distribution activities” and “distribution activities”

    insurance distribution activities

    “insurance distributor”

    distributor

    “insurance intermediary”

    insurance intermediary

    “insurance undertaking”

    insurer

    “manufacturer” and “manufacturers within the meaning of Article 2 of this Delegated Regulation”

    manufacturer

    “manufacturing”

    manufacturing

    “shall”

    must

  3. (3)

    In this sourcebook, where a reproduced provision of an article of the IDD POG Regulation refers to another part of the IDD POG Regulation, that other provision must also be read with reference to the table in (2).

Where?

PROD 1.4.7 R

1 PROD 4 applies to a firm with respect to activities carried on from an establishment maintained by it, or its appointed representative, in the United Kingdom.

[Note: article 7(2) of the IDD]

EEA territorial scope rule: compatibility with European law

PROD 1.4.8 R
  1. (1)

    1The territorial scope of PROD 4 is modified to the extent necessary to be compatible with European law.

  2. (2)

    This rule overrides every other rule in this sourcebook.

Electronic Commerce Directive: effect on territorial scope

PROD 1.4.9 G

1The rules and guidance on the E-Commerce Directive in ICOBS 1 Annex 1, Part 3, paragraph 1.2R and Part 4 paragraph 8, and in COBS 1 Annex 1, Part 2, paragraph 1.2R and Part 3, paragraph 7, apply equally in relation to the rules in PROD 4.

Interaction of PROD 4 and the RPPD Guide

PROD 1.4.10 G

1A firm to which PROD 4 applies need not apply the guidance in RPPD for matters covered by PROD if the firm has complied with PROD 4 (see also PROD 4.4.2G). PROD 4.4 includes guidance based on the RPPD which firms subject to PROD 4 should apply.