FSA issues final guidance for investment advisers

The FSA has issued its finalised suitability guidance on risk-profiling tools for investment advisers. The regulator has also revealed further concerns about the assessment of suitability of funds for clients.

The FSA has issued its finalised suitability guidance on risk-profiling tools for investment advisers while revealing further concerns about the assessment of suitability of funds for clients.

In a report published this morning, the regulator says many firms are failing to collect and account for all the information needed in order to accurately assess client risk.

In particular, the FSA highlights that firms’ questionnaires use poor question and answer options and have over sensitive scoring or attribute inappropriate weighting to answers. As a result, many advisers are not adequately assessing a client’s capacity for loss.

The report revealed that half of the investment files assessed between March 2008 and September 2010 were deemed to have failed to meet the level of risk the investor is willing or able to take.

Firms rely heavily on risk-profiling and asset allocation tools, the report says, and “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 addition, it reports poor descriptions of attitudes to risk and the failure of firms to select investments which suit the risk category of a client. These errors lead to poor outcomes for consumers and are a “specific risk” to the FSA’s consumer protection objective.

In January’s proposals for the guidance, the FSA announced nine out of the 11 risk profiling tools had weaknesses which could lead to “flawed outputs”.

The FSA is calling on all firms concerned to address this issue and ensure their risk allocation process is ‘robust’. They warn they will be assessing how firms react to the report in future supervision.

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 research carried out by the regulator also found that many risk categories are too “vague” and do not effectively explain or differentiate risk levels. It says: “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.”

There have been “many cases” where firms have failed to demonstrate an understanding of the nature of risks of different products or the assets selected for the customers.

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