The regulator used the findings of its suitability review to warn some advisers were still failing to offset the shortcomings of risk profiling tools, despite its forerunner the FSA having issued guidance on this several years ago.
The City watchdog described cases where firms were not “considering or mitigating the limitations of the risk profiling tool they used, or where the recommended solution did not match the risk the customer was willing or able to take”.
“We encourage firms to consider the finalised guidance published on risk profiling,” the report added. “Should firms identify weaknesses with their approach, we expect them to consider what steps to take to address the issue identified and mitigate any risks.”
Problems when advisers use risk profilers have included instances where differences emerge between a client’s answers and the tool’s results, as well as inconsistency in an individual’s answers and cases where risk is not presented to a client in a quantifiable form.
Despite this array of potential problems, the regulator has appeared hesitant to overhaul its approach in the area.
“The next stages in connection with that are very much to do with engaging with the industry,” said Linda Woodall, the FCA’s director of financial advice. “I don’t anticipate new rules on risk profiling.”
This bout of engagement comes as advisers face fresh regulatory scrutiny with regard to their use of the tools.
Mifid II rules coming into force next year demand that intermediaries take “reasonable steps” to ensure all information collected on clients is reliable, with this requirement extending to risk profilers.
Advisers were sympathetic to the regulator’s focus on the tools, with some suggesting further education would help.
Kim Barrett, who runs Barretts Financial Solutions, claimed a “black and white” approach to risk did not adequately reflect client behaviour.
“We have got a client who is [defined as] cautious but put money in a play to be shown on Broadway,” he said. “This does not display caution.”
The adviser also suggested his peers must look beyond theoretical definitions of risk, given the headwinds facing some asset classes traditionally viewed as defensive.
“If a client is defined as low risk you may be instructed to put them into gilts. There’s an argument that certain sovereign debt is in bubble territory but will a risk-based profiling tool see that?” he said.
Others pointed to the differing results of tools in the space. Matthew Bird, of Seer Green Financial Planning, noted his firm had switched from using a Capita offering to Distribution Technology’s Dynamic Planner tool, resulting in an apparent change in outcomes.
“With the Capita system, we would find people rated as five out of five [for risk],” he said. “With Dynamic Planner everyone is a bit lower. You never see people above eight [out of 10].”
The FCA’s findings may provide relief to some investment intermediaries.
Its review found that 94.8 per cent of investment advice given was classed as “suitable”, compared with 89.6 per cent for pension accumulation advice and 90.9 per cent for retirement income advice. But the scrutiny of risk profilers is unlikely to disappear.
“The answers are very important but quite a few of the questions revolve around a client’s understanding and experience,” added Mr Bird.
“They do serve a good purpose if you use them appropriately. But you have got to take them with a pinch of salt.”
Case study: ‘Poor practice’ risk profiling
In the FSA’s 2011 guidance – of which the FCA reminded advisers in its report last week – the watchdog highlighted the following example of poor practice.
“A firm used a third-party risk-profiling and asset-allocation tool with a large number of risk categories.
“To aid customer understanding, the firm added its own descriptions to each of the numbered categories.
“However, as the firm did not fully understand the nature of the underlying tool categorisation the name and description attributed to the categories did not correctly reflect the risks the customer was exposed to.”
IN NUMBERS
656
Number of firms assessed in the FCA’s suitability review
2019
Year in which regulator will repeat its review
