A less than complete solution
The FSA’s requirement for human involvement in risk profiling kills off the idea of a virtual adviser, says Ian McKenna, director of F&TRC
With the workplace market seen as one of the primary beneficiaries of RDR, as traditional IFA advice becomes unaffordable for vast numbers of consumers, the latest requirements from the FSA on assessing suitability raise some interesting dilemmas for the corporate market. Having now published confirmed guidance, after what must be the most rushed consultation period in regulatory history, the regulator has identified a number of additional tests they are now looking to see answered for clients.
It appears that the FSA has become rightly concerned that far too much focus has been put on client’s attitude to risk as opposed to other risk related factors such as how much risk they can reasonably carry. Just because a client may be happy to take a certain level of risk, does not mean that it is necessarily suitable for them. As can be evidenced by many compensation claims, a client’s desire to achieve a high level of return might lead them to proceed on the basis of levels of risk that are not in their best interests.
Over the last decade, the emergence of risk profiling tools has meant far better information has been captured on how a client feels about risk. It is now necessary to extend these processes to include a clear understanding of the level of risk required. That means asking how much risk a client needs to take to achieve the required level of investment return, their risk capacity or how much risk they are prepared to take and their overall risk tolerance - the amount of risk they would prefer to take. Frequently answers received to questions will be contradictory and there is a need to balance off consumers’ hunger for investment returns with their desire to avoid any investment downside.
Potentially one of the most important parts of any such system designed to address such issues must be an ability to point out to the consumer when their expectations are simply unrealistic. All too often those who have left it too late or are planning to save too little will be looking for investment returns that would be more akin to financial alchemy than financial advice.
Perhaps the most interesting challenge for the workplace market is the regulator’s statement that it is looking for advisers to validate the responses to these issues and that it is not acceptable to reply upon machine generated answers. In a market where large numbers of consumers are increasingly being offered self-service tools to help them understand these issues this appears something of an anomaly.
Presumably the FSA are not looking to mandate that all members must have specific recommendations from a human adviser. But presumably it will not be acceptable for organisations to deliver tools that do not address the additional issues of risk tolerance, risk capacity and affordability. So presumably some form of automated cross check would be expected. If, however, this can be allowed in the corporate market, why should it not be used when advising in the individual market?
One could conclude that the current FSA position seems to prohibit any fully automated individual advice process. I hope this is not their intention; it would appear an unwise constriction in the 21st century. It is more likely this is a consequence of the haste in which the guidance was written. Had more time been allowed for feedback on the original consultation, I am sure more of these issues would have surfaced, but we are where we are and we need to move on from the fact that the FSA may have come up with a less than complete solution and help them construct a more robust position.
At a recent conference the FSA did indicate it is open to further dialogue with the industry. I would suggest they need to treat their current guidance as an interim solution and proceed straight away with a more detailed review.
As workplace platforms are increasingly used to educate consumers and help them take better decisions about saving for their retirement it will, I believe, be essential for such services to fully replicate the range of guidance that would traditionally have been given in the face to face world.
Helping customers find the right balance of investment risks must be one of the most important roles for any consumer education service. It ought to be a great opportunity to set customer expectations realistically and encourage higher levels of contributions. Whilst under the current regime, where no advice is being given the market could avoid these issues, if we rise to the challenge the workplace community can substantially reinforce its role as the right place for mass market advice in the future.