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FSA risk suitability paper shows the value of final notices

As a business, we use what is published by the FSA to check against our own practices. It is a really simple approach to making sure that what we do will stand up to any regulatory scrutiny.

The publication of final notices is a good example. A regular session at our monthly best practice meetings is to discuss the content of any recently published final notice with the team and look for any examples of the things we are doing that could be interpreted as a reason for enforcement action against the firm or individual in question. It is a very useful sense check to make sure we are not making the same errors.

The publication of the recent guidance consultation paper on assessing suitability when it comes to establishing the risk an investor is prepared to take with their money is a good example of how valuable these FSA publications can be.

This has been a really important subject for over a decade, so advisers who are only just starting to review how they approach risk-profiling specifically and the investment advice process generally are coming very late to the party.

A lot of the coverage of this paper has focused on the FSA findings about the use of risk profile tools, with its report that nine of the 11 tools it assessed had weaknesses that could lead to flawed outputs.

This resulted in immediate calls from the IFA community to publish the names of the tools that failed to live up to the standards determined by our regulator, which is sort of missing the point.

Leaving aside the fact that it is easy to compare the tool you use with the examples of good and poor practice published by the FSA, the quality of risk-profiling tools was only a tiny part of the bigger issue identified.

It is the process of delivering suitable investment advice that is under scrutiny in this paper, not simply the tools that advisers elect to use within this process.

When any investment risk-profiler tool is used without a sufficiently robust process to support it, the resulting advice stands a good chance of being unsuitable.

The same can also be said for investment advice delivered without reference to goals and objectives. We often see examples of this from banks, stock-brokers and discretionary fund managers – although by no means all of them have this failing.

Rather than directing the usual level of criticism and vitriol towards the FSA, advisers might start reading the material they publish and learning from it, using what is said to improve the way that they approach the delivery of advice.

Martin Bamford is managing director at Informed Choice

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. Off you go again Martin taking shots at the IFA community and trying to keep favour with the regulator.

    It gets very tiresome.

    Here is a simple question for you, if all advice firms in the UK have a risk profiler, almost without exception, and the FSA has audit teams, has done for years, how come such a high profile element of the fact find has just been identified as an issue this year?

    We arent talking about minor detail here.

  2. My apologies if you find what I have to say tiresome, Ron. You of course have a choice about whether you read my articles.

    It’s not my intention to take shots at the IFA community; a community of which I am a part and for which I have a lot of respect.

    When all we seem to see here and on the websites for other trade publications is constant moaning about the FSA, my only intention is to restore some balance and explain how a lot of what they do is actually very useful.

    I guess this all comes down to attitude and mindset. Because we approach regulation with a positive attitude, we seem to be able to maintain a positive view about (most of) their actions.

  3. Regarding your comment re respect for the industry then may I suggest that your positivity extends to leaving out the likes of your last paragraph it is pure antagonism and not required.

    Going back to the matter in hand, you never responded to my question.

  4. Regarding your comment regarding respect for the industry then may I suggest that your positivity extends to leaving out the likes of your last paragraph it is pure antagonism and not required, everything else was ok.

    Going back to the matter in hand, you never responded to my question.

  5. martin, I too have a positive mindset. The FSA positively disgust me.
    Agree entirely with Ron.

  6. Should we, as individuals, taxpayers and licensed and qualified financial advisers, accept every brickbat and financial missile launched our way?

    When I read and publication, especially anything emanating from Canary Wharf, I look for logic and balance. I look for positive aspects also but we all realise that the last four years has offered small satisfaction in this regard.

    Martin, your pieces frequently come across as smug and patronising, whether this be your intention or not.

    You are part of a tiny minority that believe the RDR is sacrosanct and that the FSA has a clue.

  7. @Ron

    You would be surprised to learn that there are a lot of firms out there who do not use a risk profiler.

    They merely use their experience gained over decades to throw client’s money in Japan/Corporate Bond/Property/Tech or whatever else is top of the short term performance charts at the time of the investment.

    Why is it again that the public trust the financial services industry less than Estate agents?

  8. In my opinion Dathan mainly because of comments such as yours. ‘they merely use…’

    Report them and provide evidence to the regulator.

    The industry is full of those, who ‘suspect’ ‘think’ or ‘know of someone’ report them, if someone was running down members of the public in their cars they would report them.

    Do the same or do not make comments like that they are unprofessional.

    In other industries you would be fined or expelled for making those types of comments.

    I have never in my life seen an industry like this one where invention and fiction is printed on such a regular basis.

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