The FSA has finalised its risk-suitability guidance for advisers laying out a number of examples of good and bad practice.
In finalised guidance on assessing suitability of funds for clients, released this morning, the regulator says many firms are failing to collect and properly account for all the information relevant to assessing client risk.
The FSA says its research suggests many advisers are failing to adequately consider a client’s capacity for loss. It says firms’ questionnaires often use poor question and answer options which have over sensitive scoring or attribute inappropriate weighting to answers.
It warns that firms are relying too much on risk-profiling and asset allocation tools and suggests firms should mitigate against flaws in the tools they use to calculate risk profiles.
The report says: “These tools often have limitations which mean there are circumstances in which they produced flawed results. Where firms rely on tools they need to ensure they are actively mitigating any limitations.”
In January’s proposals for the guidance, the FSA said nine out of the 11 risk profiling tools had weaknesses which could lead to “flawed outputs”.
It adds that poor descriptions of attitudes to risk and the failure of firms to select investments which suit the risk category of a client are leading to poor outcomes for consumers and are a “specific risk” the FSA’s consumer protection objective.
The regulator says it will be assessing how firms react to this report in future supervision and that firms should take action to ensure their risk allocation process is “robust”.
The report says: “We expect all firms to consider whether they need to improve the way they assess and check the risk a customer is willing to take. As we apply our intrusive and intensive supervisory approach, we will be looking to see how firms have acted on this report.”
The report says research by the regulator found many risk categories are unfit for purpose as they are “vague” and do not effectively explain or differentiate risk levels.
It adds: “Even where the risk profile of the customer is correctly assessed, the product or portfolio (and underlying asset-allocation) does not always match this profile.”
It also says that there have been “many cases” of firms demonstrating a failure to understand the nature of risks of products or assets selected for customers.
The report says the high number of unsuitable investment solutions is a concern with half of the investment files assessed between March 2008 and September 2010 deemed to have failed to meet the level of risk the investor is willing to able to take.