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FCA: We still have concerns about risk profiling

The FCA says it is still concerned about advisers’ use of risk profiling tools and that firms are failing to clearly explain to clients what different risk profiles mean.

The regulator first warned about risk profiling tools in January 2011, after it found that nine risk profiling tools out of 11 reviewed could lead to flawed results.

Speaking at an eValue conference in London today, FCA technical specialist Rory Percival said while the number of firms assessing capacity for loss has improved, the regulator does not believe the issues with assessing suitability have gone away.

Percival said: “We still have concerns about this. We are talking about it now because in our day-to-day supervisory work we continue to see problems.”

He said some firms are failing to provide clear and adequate client explanations about different risk profiles, and are also not being clear enough about the risk of making a loss.

Percival also discussed advisers’ use of centralised investment propositions, such as model portfolios and discretionary fund managers.

He said advisers need to ensure they are doing appropriate due diligence.

He said: “We have seen shortcuts sometimes on files where there is an assumption the CIP is better [than the existing investment]. If you do not go through a proper analysis you are essentially flipping a coin.”

One delegate asked whether there was anything the FCA could do to ensure consumers could not complain to the Financial Ombudsman Service about simplified advice recommendations.

Percival said: “The ombudsman is different to us and its terms of reference are not down to us. But where there is reticence around simplified advice we do hear the ombudsman is a log jam. We are mindful that is an issue and that has been factored into our thinking.”

The FCA is carrying out a review into simplified advice and non-advised sales, and is expected to report its findings in the summer.


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There are 13 comments at the moment, we would love to hear your opinion too.

  1. Lawrie Hainey 14th May 2014 at 3:31 pm

    The overall system is flawed.
    I could comprehensively run through a risk profiler explaining each level of risk. Then discuss their attitude to loss again comprehensively. I would then produce a result which the client would agree on.

    The next day another IFA could go through the exact procedure and come away with a different result.
    The FCA needs to understand that it is fickle human beings that we deal with and not machines that churn out the same results every time.

    Allow us to get on with the job and stop this nit picking nonsense.

  2. It may help if the FCA (and the industry) stopped talking about risk. Risk is clear concept that is cable of measurement because the elements of the risk assessment are quantifiable.
    In investment advice all that we have are uncertainties; uncertainties of the market, uncertainties of the product, uncertainties of the product management and uncertainties of the needs and attitude of the client. And then add to that the uncertainty of the the adviser’s understanding of all those elements.
    If we truly understood the economic market there would be no fluctuations; if we truly understood the investment market there would be no speculative gain. There is now a mountain of research that demonstrates that clients do not know their own attitude to a range of subjects, so how much credence can be put on what they say. And what people say and what they mean can be very different animals.
    Since there are so many unquantifiable variables, including unknown unknowns, it would be pertinent for the FCA to be rather more precise about what they mean when they start to talk about risk and about suitability. Merely uttering the words is not a help, yet this is all they have ever done. At no stage has the regulator provided a statement on the topic that has any meat on it for the industry to chew on, and then either swallow or spit out.
    At the present time the situation resembles the worlds religions. One does not have to doubt the sincerity of the adherents of any particular religion, but it is clear that certain aspects are quite differently understood by by different religions and often by different sects within religions. Fortunately dialogue rather than fighting is becoming a more accepted norm.
    That analysis certainly applies to the financial industry. It is about time that the FCA started to specify some basic concepts and DEBATE them with the industry in order to achieve a workable definition that is understandable, and usable, to both the industry and the consumer. The process is unlikely ever to be faultless, but it must be a step up from the current content free jargon that is issuing from Canary Wharf. And far better than fighting the industry at every turn,

  3. How much does the regulator (FSA or FCA; same people and attitudes so it makes little difference) know about risk anyway ?

    Apparently none; as they knew of the many problems facing the likes of keydata and or others and decided the “RISK” wasn’t great enough to inform the industry ??

    If you are going to bungee jump make sure the elastic is attached to your ankles !!!

  4. Exasperated Me 15th May 2014 at 8:52 am

    Dear client, nothing is guaranteed, you could lose everything.

  5. Julian Stevens 15th May 2014 at 6:50 pm

    Perhaps a year or two out in the field actually doing the job on this side of the fence and trying to interpret correctly the endless stream of regulatory updates and woolly guidance emanating from Canary Wharf might help Mr Percival gain a more balanced perspective on what life is actually like this side of the fence. Whilst he’s at it, he might care to have a bash at doing a few GABRIEL returns ~ all in the interests of helping the FCA in its “pragmatic” approach to regulation.

  6. Philip Castle 16th May 2014 at 8:53 am

    @ Julian – To be fair to Rory Percival, have you actually checked his background? Have you MET the guy Julian?
    Like you I can be VERY critical of the FCA, but it is more the culture than the individuals and I actually think Rory Percival is trying his hardest to do a very difficult job.
    Personally I prefer being this side of the fence and not having to do his job and take criticism of the FSAs stance on the Longstop on the chin (as I gave him publicly at an FSA seminar at Bath Racecourse pre RDR).

  7. Hi Philip

    You know the old saying some people try their hardest others succeed !! you don’t go home with the prom queen just for trying hard !!

    I spoke to a guy one day on Rory and by all accounts he is a nice guy, but he did say he is often gets mis-quoted, and mis-understood now that speak volumes.
    By his own admission (MM article quite a while ago) he is on his own career trajectory, do his time at the FSA/FCA then on to a nice little non exc/director job !!!

  8. Julian Stevens 16th May 2014 at 9:47 am

    To Phil Castle ~ According to MM’s profile of RP undertaken in November 2012, yes, he has in fact been a financial adviser. 1987 – 1993: Financial adviser and technical support, General Portfolio, followed by 1993 – 1996: Financial adviser and technical support, Medical Insurance Agency. The less said about General Portfolio the better, though he only spent 3 years with MIA and that ended 18 years ago so, by now, he must surely be somewhat out of touch with what’s it’s like these days on this side of the fence.

    I haven’t met him, though I hear from various people who have that he seems to be a reasonable fellow. This however is somewhat at odds with rather a lot of what I read about him and his statements in publications such as this.

    If he’s being misquoted (and I wasn’t exactly happy with MM’s last profile on me), then he really ought to take to task those who do so and issue clarification.

  9. Lawrie Hainey 16th May 2014 at 9:53 am

    He is also on Mega bucks and needs to justify his position by issuing more nonsensical rules from the Golden Palace. These guys are career parasites.

  10. @DH – I suppose that is one of the main differences with IFAs v bank and regulatory staff. Our career trajectory is often simply to be better at what we do for our clients whilst earning a decent living, not climbing a greasy pole (the Romans had a name for it too I can’t remember). I think that is what many FCA staff can’t understand about IFAs, we are not looking to climb anything, we are looking to be able to be who we are without being forced to be who they think we should be and want us to be.

  11. @Lawrie – Is he on mega bucks?

    @Julian – I’ve been misreported before and I suspect you have to. Even when what is said is factually correct, when taken out of context, it can give a totally different impression.

    One of the reasons most of my posting is now on MM rather than other sites, is that MM are on the whole pretty balanced in their reporting.

    Rory Percival did the presentation at the PFS smeinar in Kent last month (bit embarassing fro me as I arrived late and had to walk past him), but what I heard of what he was saying, I pretty much agreed with. HOWEVER insufficient clear agreement of risk definitions IS a significant problem which only the F-pack can resolve and that means involvement of FCA, FOS and FSCS. It is no good the FCA coming out with agreed risk metrics, only for the FOS to employ numpties or to use new terms to uphold old cases.

  12. It doesn’t really matter if Mr Percival is nice or mean; it doesn’t matter whether IFAs have a non-FCA understandable career path. What does matter is that the FCA are going to have your goollies over a matter on which everyone in the industry is in a majority of 1. Put 12 advisers in room to discuss Profiling Tools and you will end up with at least 24 different opinions.
    The relevant research on the associated topics arrives at one conclusion – we still do not have a workable knowledge of investment uncertainty, of clients attitudes longer than a couple of hours, of interpretation and misinterpretation.
    “@Julian – I’ve been misreported before and I suspect you have to. Even when what is said is factually correct, when taken out of context, it can give a totally different impression.” Philip Castle.
    So the FCA can say what they want and hang you for it. Claiming outstanding competence and incredible knowledge does not mean a thing if the FCA decide you are in the wrong “in their opinion”.
    They produced a paper a couple of years back on risk assessment and absolutely nowhere in the document is an explanation of what they were looking for, or even a vague definition of risk. All that came out of the paper was that they were happy with people who had written lots. I suppose that is a start, even if the records are total garbage. Even if they are factual the FOS has a tendency to believe the client if they deny everything.
    Until IFAs start to focus on the fundamental problems and demand clear, unambiguous statements from the FCA you are all going to live in fear, or oblivion, during your careers. And FCA will get bigger and bigger bonuses, without in any way whatsoever improving the outcome for the consumer. [Doesn’t is make one green with envy!]
    Mr Percival needs to be clear on a number of issues. Firstly, if there are still issues about risk profiling tools can we take it that the providers of these tools either incompetence or lazy. Have any changes been made, or have the changes moved the tools in the wrong direction? And, frankly, I would like to know what the FCA consider to be the ideal criteria for such tools, and how they believe they should be developed and used.
    I would also like a confirmation that, using current knowledge, rebuilding these tools in another way would make them any better. If they can give such an assurance then advisers will have proof positive that the inhabitants of Canary Wharf should only be allowed crayons.
    Secondly, is he saying that Advisers are using the tools in a non-competent manner. If this is the case then they should have tutorials demonstrating how they expect the tools to be used. And a guarantee that if the Tools are so used the relevant IFA is immune from prosecution and disciple when things go wrong. Yes, when not if, because there is still too little information relating to comments made today, and comments made tomorrow when the complaint is made.
    Thirdly, is he saying that if Advisers all gave a clear and comprehensive statement of risk profiles to clients they all would a) understand the concepts involved and b) remember that they understood them 6, 12, 18 months down the line. [I was tempted to use hours as the reference frame, but perhaps that would have been too frivolous.]
    I have little doubt that there are providers and advisers who are cavalier in their attitude to such matters, but it is probably that the majority are trying their honest best. Mr P and his department have little interest in such a declaration if advisers actions are not in accordance with FCA Rules. So would he please state the rules the FCA are operating by in a clear and concise manner. I for one have never seen such a statement.
    The mere fact of making a clear statement would provide a basis for future guidance and debate. There can be no solid basis for debate and technical refinement on the basis of the comments that emanate from too many of the FCA. Making comments without meaningful content is the way Civil Servants survive (and they are brilliant at it), but it is no way to run an industry.
    Remember that this is your career. The FCA Mr Percivals move on, and the next Mr Percival will almost certainly say something different because how could he be distinguished from his predecessor. For that reason it is important to nail them on specifics, not whether he’s a nice chap.

  13. David Roberts 29th May 2014 at 9:59 am

    The fixation with risk and risk profilers is mis-guided. The real issues concern the establishment of investors’ capacity for loss, volitility tolerance, timescales and their return expectations. Attitude to risk is but one small part of the overall picture.

    Would anyone expect travel agents to ask clients what level of accident fear they have in order to decide on their preferred type of holiday and activity and mode of travel?

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