Financial Conduct Authority  

How to address the FCA's suitability concerns

  • To understand what the 2015 FCA review entailed.
  • To learn how wealth managers and financial planners can work together to ensure suitability.
  • To understand what makes for a suitable investment proposition.
CPD
Approx.30min

In 2011, the FCA revealed that nine out of the eleven risk-profiling and asset-allocation tools it examined had features that increased the probability that, in certain circumstances, the output might not accurately reflect the risk that a customer was willing or able to take.

During the December 2015 thematic review, the regulator also expressed concerns over advisers not seeking to clarify conflicting or inconsistent responses on risk questionnaires.  

A risk questionnaire that asks appropriate questions does provide a reasonable basis for assessing a client’s attitude to risk. So wealth managers need to ensure that the questionnaires they use, whether created in-house or supplied by a third party, produce an accurate reflection of the client’s attitude to risk.

As circumstances change this has to be regularly updated. Nevertheless, an even more effective method of assessing risk entails a financial planner carrying out a complete, holistic assessment of the client’s total wealth and investment outlook. 

To get a full picture of the client’s tolerance of risk, a range of ‘soft facts’ needs to be taken into account. Is the client expecting an inheritance at some point? What is their health like?

Can they foresee any large expenses in the future, such as paying for a wedding or helping a child to get on the property ladder? How much capital do they need to access for unforeseen expenditure, such as unexpected property repairs? Is their income likely to substantially increase in the next five to ten years as their career progresses? 

A financial planner, particularly one who already has an existing relationship with the client, is best placed to provide a wealth manager with this information. The planner can provide real insight into a client’s attitude to risk that enables the wealth manager to create a suitably tailored portfolio. 

A wealth manager may scale their risk profiles from say one to five (with one being the lowest attitude to risk and five the highest).

Yet it is not uncommon for a financial planner, having carried out a complete financial assessment, to recommend a risk profile for a client that is up to two scales higher or lower than that suggested by psychometric testing.  

Both the wealth manager and the financial planner need to ensure that the reasoning behind the investment strategy is accurately documented in the client’s file to demonstrate the client is invested in a suitable mix of assets.

The FCA has said that it expects firms to ensure that the customer information that has been gathered, and recorded, matches the underlying investment portfolio and that the firm is in a position to demonstrate this.