FSA warns on risk-profiling tools
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The FSA has proposed guidance on assessing the suitability of investment advice and has warned that many risk-profiling tools could lead to flawed results.
In a guidance consultation paper, published this week, the regulator reveals that out of 11 risk-profiling tools assessed it identified nine tools with weaknesses which could lead to “flawed outputs”.
The review included tools designed in-house by firms and those provided by third-parties, including platforms. The FSA declined to provide Money Marketing with a list of the tools it identified as having weaknesses.
The FSA says: “Tools can usefully aid discussions with customers, by helping to provide structure and promote consistency. But they often have limitations which mean there are circumstances in which they may produce flawed results.
“Where firms rely on tools they need to ensure they are actively mitigating any limitations through the suitability assessment and ‘know your customer’ process.”
The warning follows a review of existing data held by the FSA and new information collected from firms on the way they risk profile clients and allocate their assets.
The regulator says out of the 366 investment files it found to be unsuitable between March 2008 and September 2010, over half were deemed to be unsuitable because the investment selection failed to meet the customer’s risk profile.
The review included cases from previous thematic work and a sample of risk-profiling and asset allocation methodologies used by banks, insurers, IFAs, discretionary and advisory investment managers, networks, platform providers and third party tool providers.
It acknowledges these figures may not reflect the quality of discretionary management or pensions and investment advice across the whole of the market, as the review in some cases focused on higher risk firms.
The FSA says: “The high number of unsuitable investment selections we see in the pensions and investment markets is still a significant concern. It is a specific risk to our consumer protection objective.
“The level of failure in this area is unacceptable. We have taken, and continue to take, tough action to address these failings with individual firms.”
The regulator found many firms it reviewed considered attitude to risk but did not take into account the client’s ability to absorb a fall in the value of their investment.
It also expresses concerns that client risk questionnaires often use poor question and answer options, have over-sensitive scoring or attribute inappropriate weighting to answers.
The FSA says it has also seen examples where firms are failing to have a robust process in place to identify customers that would be best served by putting their money in cash deposits due to an unwillingness to risk loss of capital.
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Readers' comments (40)
Chris F | 7 Jan 2011 9:25 am
1) Perhaps the FSA can TELL us what constitutes an effective risk profiler.
2) They are, however, correct to say that avoidance of capital loss is not identified readily enough. There is a perception that you cannot invest funds for a client in this case, although of course providing the timescales fit with FSCS backed products of any type (including bank accounts)
3) Finally, perhaps the FSA can TELL us what constitutes an effective risk profiler.
Did I also mention that perhaps the FSA - instead of telling us what DOES NOT constitute an effective risk profiler - could tell us what DOES.
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Duncan Philp | 7 Jan 2011 9:28 am
If the FSA have found flaws in any platform risk profile tool then why are they not telling us!!!!!
Surely it is in everyones interest to have this information and be able to act on this.
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Anonymous | 7 Jan 2011 9:29 am
It would have been helpful if they'd told us which of the tools they found to be unflawed. Of course there are going to be problems if people ignore the tools and simply recommend whatever fund(s) they happen to favour that month. At the end of the day they are just tools and so cannot be used in isolation.
Given current cash returns and inflation rates I would have though that putting all one's money in cash depsoits is a HIGH risk strategy other than for the very short term!
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Marcus Reilly | 7 Jan 2011 9:34 am
so which ones are flawed? The guidance consultation doesn't appear to list them. Come on MM. Be useful & give us the list.
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Editor's comments | 7 Jan 2011 9:34 am
Hi Marcus,
The FSA will not reveal the names of the risk-profiling tools it identified as having weaknesses.
Regards
Med Evans | 7 Jan 2011 9:38 am
ALL profiler tools, model portfolio's etc will never be perfect. Wouldn't it be a refreshing change if the FSA lead the way in creating a best practice tool. If their attitude was to serve and protect the financial services industry, which in turn would serve and protect the end user.
Very few could argue with a dictatorial best practice
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susan the finance | 7 Jan 2011 9:42 am
when I attended an FSA meeting I was recently 'invited' to attend, this very subject came up and I asked why the FSA does not construct it's own tool which we all compelled to use. The response was that they do not have the expertise 'in-house' to construct such a document. I then asked why don't they outsource the project, to which he did not respond! I agree with the previous comments in that the FSA is ALWAYS ready to say what they dont want, but they are very slow at telling us precisely what they do want!
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Swanny | 7 Jan 2011 9:44 am
Isn't this typical FSA
They don't like this and they don't like that and yet they do not offer any reasonable guidance.
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Steve W | 7 Jan 2011 9:46 am
Money Marketing - are you waiting for enough of us to shout out before you issue the list?
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Wayne Clark | 7 Jan 2011 9:49 am
Why not do away with all these tools and now treat all clients as individuals and thereby tailor advice to each client on an individual basis? Is one size fits all finally dead?
Think I am suffering from deja vu, as wasn't this what we used to do 10-15 years ago until we were told we had under TCF to treat clients the same, ie if they were similar clients they should expect the same outcome.
I agree with the above the FSA need to stop telling us what is wrong and unsatisfactory and start telling us what they consider to be right!
Mind you we will probably argue with that and tell them they are wrong :-)
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Rob | 7 Jan 2011 9:57 am
Reading between the lines another area for the FSA to highlight and justify there existance. I totally agree with the above point ok where do we go from here why dont you offer a solution? Its not good enough just to hammer the area!
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