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Suitable areas for guidance

Many of you will be wondering what this year will bring. On the regulatory front, we are still awaiting publication of the delayed policy statement that should set out the final rules on the professionalism strand of the retail distribution review. The criteria and role of accrediting bodies is of great interest to the Personal Finance Society but more urgently needed is clarification of our requirement to “verify” qualification gap-fill.

We have a programme of more than 80 face-to-face dedicated gap-fill sessions already planned for this year and are confident that members attending will be meeting the FSA’s requirements but confirmation that the job is done would be reassuring. By the time you read this, we hope the matter will have been resolved.

What was not expected from the FSA, however, was a guidance consultation on assessing suitability. The paper is not constructed in the usual way. There are just three weeks in which to provide comments and there are no consultative questions being asked. It appears to me as a fait accompli.

Is the guidance helpful or a problem? Assessing suitability is undoubtedly one of the most important parts of the advice process and the vast majority of upheld complaints are due to a failure to demonstrate suitability of the advice or a product.

On the surface, the FSA guidance with its examples of good and bad practice seems helpful. However, process is a concern as the FSA is effectively stating that all firms need to review their processes to ensure they address the points raised in the guidance. The guidance also states: “As we apply our intrusive and intensive supervisory approach, we will be looking to see how firms have acted on this report.”

So is it a report or a consultation?

There is considerable emphasis in the guidance on the need for advisers to assess not only their clients’ understanding and appetite for risk but also their “capacity for loss”. The FSA’s definition of this is where “any loss of capital would have a materially detrimental effect on their standard of living”.

This reinforces the need for regular reviews to identify any changes in clients’ personal circumstances to ensure investments are still suitable. Fact-finding in many cases will need to go deeper. How will this affect simplified advice?

Risk profiling and asset allocation tools must be fully understood by advisers and not overly relied upon. The words used by firms when describing risk categories must not be emotive, judgemental or mislead clients “because they con-sider the connotations of the words rather than the risk being described”.

It seems that a better place to start would have been for the FSA to take a hard look at the fund sector. There are fund classes and individual funds with names that could easily mislead consumers – guaranteed funds that are not guaranteed, growth and opportunity funds that lose money and the absolute return sector with no absolute guarantee of a return.

Recent news indicates the FSA may review this area. This is very welcome and we look forward to hearing more.

Fay Goddard is chief executive of the Personal Finance Society

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Comments

There is one comment at the moment, we would love to hear your opinion too.

  1. Would it really make any difference if “consultative questions” were being asked? The FSA never publishes the responses to its consultations, preferring merely to state that it’s “taken them on board” (and promptly thrown over the side any which happen not to accord with its pre-set agenda).

    Words to describe risk are of little or no value. What the client needs to see is figures showing the sort of falls that a particular fund has in the past and and is likely therefore to suffer from time to time in the future, followed by further figures to demonstrate what this actually means in a medium to long term context, i.e. the fund may have fallen 20% in 2008 but, as may be seen, it bounced back by 25% the following year. Are you prepared to accept those types in fluctation to achieve over the mediium to long term substantially better returns than are likely to be available from secure investments?

    Performance is all about percentages. So, therefore, should be any explanation of risk or volatility. IMHO of course.

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