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FSA calls on IFAs to “sense-check” risk profiling approach

The FSA says advisers should “sense-check” their recommendations to ensure they reflect clients’ attitudes to risk rather than relying on a tick-box, process-driven approach to risk-profiling.

Speaking to Money Marketing, FSA head of conduct risk Nausicaa Delfas says some processes can lead to a gradual shift away from clients’ actual risk tolerance.

She said: “You might have the processes in place and be ticking the boxes but what is actually important is whether the outcome for the consumer is the right one, so you need to cross-check and sense-check the findings. The specific sections of the investment process, from using a risk-profiling tool through to picking investment products, all link together and if they do not, you can end up in a different place to where you should be in terms of risk.”

Research carried out by the FSA as part of its guidance on assessing suitability, published in March, found poor risk assessments were behind half of all investment files it found to be unsuitable.

Delfas says the regulator was concerned the problem could grow if it did not intervene, so it issued the guidance and held a seminar for advisers on the issue in London last week.

She said: “We want to work with the industry to fix this but we will not rule out taking action if problems continue.”

Syndaxi Financial Planning managing director Robert Reid says: “The FSA is good at telling us what not to do but why hasn’t the regulator come up with some kind of best practice guide?”


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. This is great coming from the people who introduced box ticking to the industry.

    And what the hell is ‘sense check’? Sounds like something from Orwell’s 1984 termed as double speak.

  2. Perhaps theFSA should sense check their own advice? What about sense checking Adviser Charging? What about the conflict in regulatory reporting and regulating of product and advice…..

  3. I couldn’t agree more with Robert Reid’s comments. Although I really can’t imagine any decent IFA relying on just the output of a risk profiling tool, especially given the FSA’s wonderfully helpful comments on how the majority of profiling tools were flawed without given any indications as which ones they were.

  4. Julian Stevens 27th May 2011 at 9:21 am

    As much as anything else, it’s about managing client expectations (which can often be unreasonable) and differentiating between short term volatility (on paper) and risk of actual loss (on eventual encashment).

    If a client refuses to moderate unrealistic expectations, such as wanting unit trust investments only ever to go up and up in value like some sort of turbo charged cash account, then you have to walk away. That can be very difficult if you haven’t charged a fee for your advice as opposed merely to pitching speculatively for a commission-generating product sale, particularly if you have a sales manager breathing down your neck to meet stiff targets, and we all know where that type of mentality is most prevalent.

  5. Paul Resnik, FinaMetrica 28th May 2011 at 10:40 am

    It seems to me that the FSA is saying that the adviser must apply common sense in the process that results in the investment recommendation. Automated solutions, sometimes called ‘portfolio pickers’ cannot deal adaquatley with the nuances and conflicts that are inherent in each investors personal needs and circumstances. What is needed is professional judgement.

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