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FCA: We still have concerns about risk profiling

Regulator still concerned that firms are failing to clearly explain to clients what different risk profiles mean

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

The regulator first warned about risk-profiling tools in January 2011 after it found that nine tools out of 11 reviewed could lead to flawed results. It carried out a review of
366 investment files that it found to be unsuitable between March 2008 and September 2010 and discovered that over half were deemed unsuitable because the investment selection failed to meet the customer’s risk profile.

Speaking at an eValue conference in London last week, FCA technical specialist Rory Percival said that while the number of firms assessing capacity for loss has improved, the regulator does not think 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 for different risk profiles and are 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 from 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 it has been factored into our thinking.”

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

Stiddard director Jason Levett says: “When going through a risk questionnaire, advisers have to try not to influence the choices clients make but explain to them clearly the implications of their choices.

“I have heard concerns that some firms running these risk-profiling tools have a conflict because they have an interest in promoting investment business. We use Morningstar for that reason because it is not tied to a product provider.”

Levett believes the FCA is right to raise concerns about CIPS because he has come across instances where clients incur costs from being moved into an advice firm’s CIP.

He adds: “If advisers have a CIP, they have to be able to say to certain clients: ‘This is not appropriate for you’. The trouble is some firms are not prepared to say goodbye to the client before they have started.”


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There is one comment at the moment, we would love to hear your opinion too.

  1. Julian Stevens 22nd May 2014 at 7:55 am

    Percival said: “The ombudsman is different from us and its terms of reference are not down to us”, Why? Shouldn’t the terms of reference used by both organisations be exactly the same? Add to these differences the FCA’s frequently woolly guidance in so many areas and it’s not hard to see why so many intermediaries feel themselves to be in a lose lose situation. We’re damned if we do it this way and damned if we do it that way.

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