FCA: Don’t rely on fund risk ‘opinion’

Advisers should not rely on fund managers’ “opinion” of what level of risk their fund represents, according to the regulator.

Speaking at a Defaqto conference on outsourcing yesterday, Rory Percival, technical specialist at the FCA, said advisers must come to their own conclusion on the risk level of a fund rather then relying on what investment managers state.

Mr Percival said advisers are not expected to go down “layer upon layer” when doing due diligence on a fund and that accepting “factual elements”, such as investment holdings, is fine. Risk, however, is another matter.

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“What you can’t take as face value, and you have to come to your own view on, is opinion,” he said. “If a company says ‘this is a low-risk fund’, that is opinion.”

Mr Percival said that a key area of concern for the regulator was the mapping of clients’ risk profiles to risk-rated funds, adding that it had seen very few examples of good disclosure of risk by advisers.

“One area of concern is this mapping exercise,” he said. “What is your understanding of your client’s risk profile? What is the risk rating of the fund or portfolio? Do those map together? You have got to do the thinking and make sure that it is correct. By all means have risk-rated funds but be aware of the context in which they are recommended.”

Responding to a delegate query on how to evidence use of outsourcing solutions in any form, Mr Percival said that although the regulator does not like to be prescriptive on how advisers do this, there are four main steps:

• Think: is the solution right for the client?

• Make sure the solution is robust

• Write down the decision-making process

• Check it works and monitor it

He added that, in final notices of cases where firms have acted inappropriately, it is typically one or more of these steps that the firm has not followed. Mr Percival recommended that advisers look at final notices to gauge where problems might arise.