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FSA sets out its risk-suitability concerns

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.


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There are 14 comments at the moment, we would love to hear your opinion too.

  1. We should all start giving advice like Martin Lewis of under journalistic principle and have a big website where the FSA clearly are not allowed to regulate or choose not too.

    Isn’t it ridiculous that the FSA yet again beat IFA’s overhead where we are trying to do the job correctly when they choose not to regulate the activities of many people like Martin Lewis who are blatantly giving opinions which I believe to be advice and the profiting from financial services without any regulation or any contribution to the regulator. Maybe the FSA would like to take more interest in these activities and concentrating its on regulating financial services properly. I would have fought a website called should be regulated but whom I I’m only a humble IFA who the regulator deemed not to be a financial expert until I get my diploma lol -whereas money-saving expert is due to the fact that he says so in the title. I call that great customer protection?

  2. the complexity of many funds and the hidden risk posed by funds investing into other funds make it difficult for advisors to know what the real risk to an investor really is,
    I have been advising investors for 24 years and know that a great deal of hype is used in this business,
    timing is probablly the most critical factor, just take a rear view look for the past 10 years or so, falling yields, great volitility and gross abuse of the financial system by some big players leading to melt down and greater risk to investors,
    government policy is a risk which we have little/no control over, just take a look at the pension industry over the last 25years, as an advisor I made recommendations which have been undermined by change in government policy.

  3. To Peter Herd… I wonder how confused your clients are when they receive your Suitability Letters, and see sentences like “I would have ‘fought’ a website called…”

  4. This is just another example of the FSA throwing the grenade into the room and shutting the door. IFAs are keen to make sure that the risk profile is matched against the fund or investment solution for the client but unless they give clear guidance and preferably how they would like risk to be clearly explained and measured, we are groping around in the dark hoping the grenade doesn’t go off. Surely the risk profiler companies can help get their tools correct but the FSA must also understand that asset allocation is only part of the risk control solution that can be taken (remember when all asset classes fell in coorelation in 2008?).

    If the FSA wants to have a consistent and robust approach taken to assessing risk, there must be a consistent and robust methodology to help us identify the different types of risk and the questions that should be asked. Only then will there be a consistent output and solution. One man’s risk could be another man’s reward – at least the FSA could provide us with an instruction manual that everyone can use. Or is that too difficult a problem for them to help us with?

  5. Joe

    Easy, if you don’t understand a fund, then for God’s sake don’t put any client money into it! Ditto for if you don’t know where a FoF is investing…..

  6. I totally agree Dathen, and I don’t, didn’t,

    my observations of some funds mangers / and marketing departments has lead me to the question the very concept of risk control.
    the current government policy for militery action is posing risk to investors in most asset classes.

    I only include my point of view from a risk perspective and not on a political one,

  7. Sorry for being dyslexic, but what did you think of the point?

    The fact is as IFA’s we all pay into the financial services compensation scheme and the FSA and when we get it wrong compensation is paid. My point in raising this issue of Martin Lewis is that individuals like him give advice under journalistic principle but when it goes wrong we as IFA’s are the ones left paying the bill for the compensation in increased FSCS fees.

    Isn’t about time the IFA community started to realise that we need to protect our advice giving services and that people like Martin Lewis, accountants, solicitors that give advice without been authorised should be stopped and encouraged to work in the legal framework, as we all do.

    The FSA spent far too much time concentrating on minute detail like attitude to risk reports instead they should concentrate more of their efforts on enforcement of individuals that give advice without having correct authorisation. Have a look at money-saving expert and tell me if you don’t think that this website is marketing regulatory activity and profiting from it.

  8. @ Peter Herd

    ‘The FSA spent far too much time concentrating on minute detail like attitude to risk reports’.

    Personally I would hold that ATR and CFR are the cornerstones of any advice process and are not ‘minute details’. I also fail to understand what slagging off Martin’s website has to do with the FSA paper.

    Having read the paper I think it is a reasonable document, which covers off concerns that a lot of people in the industry have over the thorny issue of assessing a client’s capacity for/attitude to investment risk.

    Which specific bits of the paper did you not like Peter? Maybe you could post some sections you have concerns about so we can understand your issues.

  9. My first question to the regulator would be,

    if you take a normal member of the public, question them and use the best risk profiling system on the planet, what is the best level of accuracy which can be attained?

    If the regulator has not tested this properly or cannot answer, then how can anyone say which is a good system and which is a bad one?

    Surely it is the result which should be measured?

    The worst possible looking system could yield the best result, if it is not the result which is judged then how does a person, who is steeped in financial services every working day, judge one of these systems which is designed for the general public?

    I corrected an advertiser for mispelling ‘adviser’ with ‘advisor’, that person pointed out to me that x percent of searches are incorrectly spelled, so spell it both ways, that is the difference of aiming something at the public or maintaining a professional persona to other industry individuals.

  10. Dathan

    I would totally agree with you that ATR and CFR are cornerstones of our industry and ones I take very seriously. Much of what we do in financial services can be interpretative in a subjective way and that is the reasons why good quality suitability report writing is so essential. My only criticism of the present system is that these documents become far too long and some customers do not read the entire documents or understand every point that into them.

    I think you’ve missed my point entirely regarding Martin Lewis or other people like him, although in essence I find much of the information that he provides to be both useful and accurate. My point is that he is not regulated, if his site makes a major error, who pays the compensation?

    We talking about this particular article about risk, while it’s not just about the risk of an individual product it’s about the risk of getting information from unregulated sources. A good example of this is his National Savings Premium Bonds calculator. As everybody knows when you build a portfolio for clients you have to have a certain degree of money in guaranteed safe investments. By just providing a calculator without truly understanding the purposes of national savings in a whole portfolio surely this providing advice that some clients will act upon without taking into consideration the whole effect on their portfolio.

    Another example would be a site like this recommends investments in a bank account which offers extremely good interest rates (Icelandic accounts for example) without fully explaining the potential downsides of that investment. To my knowledge I’m not saying that his site has ever done this but this is just to show the potential risks. After all he does say that he has over 10 million users.

    Once again I’m not slagging off an individual, what I’m trying to do is highlight the importance of IFA’s to publicise the fact that seeking independent financial advice from a registered individual is very important.

    If this site was to become regulated and Mr Lewis was to become authorised under the present system I would not have a problem and in fact I would welcome him to the ranks of the IFA community, as he has an awful lot of good messages. All I ask for is a level playing field.

  11. FSA = good at perceiving risk where there is little, but totally failing to perceive it where it is high.

  12. @Peter. I agree with your thoughts on the length of suitability letters. Too long and you could be hung, too short ditto…. I always err on the side of too much rather than too little.

    Re MSE and Martin. A quick look at the Register reveals that Martin’s FSA number is 438382. He has been regulated since 2005.

  13. @Dathan Thanks for confirming Martins FSA number but I notice that this is not allow him to talk about investments pensions etc. His authorisation is on pure protection and noninvestment contracts only. My point is also that his website in my humble opinion contravenes the FSA standards by not having a complaints procedure or in fact detailing what he is authorised on by the FSA. There is far too much talk of journalistic principle whatever that means?

    You may think that I’ve been a bit picky but I for one think if we have standards then we should all be made to abide by them. I also think that not fully disclosing your income source eg pay for click from debt consulting company and other third parties,while promoting so called free advice is comfusing.

    I could not see any mention of FSA authorisation on his web site – see below to see what I mean.

    Important! How this site works

    We think it’s important you understand the strengths and limitations of the site. We’re a journalistic website and aim to provide the best MoneySaving guides, tips, tools and techniques, but can’t guarantee to be perfect, so do note you use the information at your own risk and we can’t accept liability if things go wrong.
    This info does not constitute financial advice, always do your own research on top to ensure it’s right for your specific circumstances and remember we focus on rates not service.

    We don’t as a general policy investigate the solvency of companies mentioned (how likely they are to go bust), but there is a risk any company can struggle and it’s rarely made public until it’s too late (see the section 75 guide for protection tips).
    We often link to other websites, but we can’t be responsible for their content.
    Always remember anyone can post on the MSE forums, so it can be very different from our opinion.

  14. @ Peter.

    If everyone knows that the MSE site is only for ‘information only’ and was NOT ADVICE then fair enough. However, when he says ‘Best ISA’ Joe public thinks that this is somehow advice and buys it, without any sort of due diligence. So people end up buying Icelandic bank stuff with all that happens as a result.

    I think MSE needs to nail the disclaimers to show what exactly they are offering, and maybe also disclosure of the way the site is funded.

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