The FCA has again stated its expectations of firms in relation to assessing clients’ attitudes to risk and capacity for financial loss.
This is not new news – three years ago the FSA published its guidance in relation to this matter.
So why is the FCA continuing to discuss this subject at industry conferences?
Not to put too fine a point on it, the industry is still getting it wrong in the eyes of the regulator.
The FCA’s impatience is crystallised by the number of fines being issued in relation to assessment of risk – some larger firms have been hit with payouts of up to £1.8m while smaller regulated firms have suffered fines of about £20,000.
Indded, the assessment of a client’s attitude to risk is often too formulaic and in some instances is driven by the adviser’s preferred product solution.
What is the FCA specifically concerned about?
Risk profiling: There are many tools on the market. The FSA previously indicated its concern with the way many risk-profiling tools work, but the FCA is also concerned about how they are used by advisers.
There are specific concerns with regards to the weightings applied, the questions asked of the client and an over-reliance on the tool as a replacement for the adviser’s view of the client’s attitude to risk and capacity for financial loss.
In other words, some firms are not assessing the appropriateness of the tool given their business model and target client market, but simply rely on these tools to deliver a one-size-fits-all solution.
Misleading descriptions: The use of poor terminology and complex jargon may lead the client down an erroneous path that could lead to subsequent misunderstandings and unintended outcomes for the client.
Asset allocation: The primary concern of the FCA is the perceived inflexibility within asset allocation models and
shoe-horning clients into solutions that may not meet the overall investment attitude to risk.
Investment selection: The adviser is responsible for ensuring the selection of investments meets the client attitude to risk and their capacity for investment loss. However, the FCA has found that often the finer details on product risk are shrouded by technicalities and complex and voluminous disclosure.
The FCA is clear the adviser must ensure the product is suitable for the client given the client’s “real” attitude to risk and capacity for financial loss.
- Does the automated tool allow for flexibility in responses?
- Is the tool too formulaic? Do you understand how the tool is constructed?
- Are the questions within the tool contradictory?
- Do the advisers gather all relevant client information?
- What happens when the results of the tool do not accord with what the client is telling the adviser?
- What are your complaints telling you about the manner in which risk is assessed?
If you take one main point away from this article, it should be to remember your assessment of a client’s attitude to risk and capacity for investment loss cannot be determined solely by a risk-profiling tool and these tools must meet the requirements of your firm – that is, be bespoke to the business’s client base and service offering.
Simon Collins is managing director of RGP Compliance