Advisers and fund buyers using risk profiling tools will fall foul of the incoming Mifid II rules if they fail to improve their due diligence on the space, former FCA specialist Rory Percival has warned.
The former regulator said wording in the incoming European regulations meant advisers would need to undertake additional due diligence on their chosen risk tools – with time running out before the January 2018 implementation date.
Mifid II – which is still in draft format with the FCA due to publish finalised wording this summer – states that advisers must take “reasonable steps” to ensure all information collected on clients is reliable.
However, this extends to risk-profiling tools and their suitability, meaning advisers could be required to mitigate serious misgivings about the programmes.
Speaking at the Morningstar Investment Conference, Mr Percival said: “Some time between now and January [advisers] are going to need to assess [whether] the risk profiling tool is fit for purpose, and this is an additional function [they] need to do.”
The assessment of risk profiling tools is currently part of a wider study being conducted by the FCA into the suitability of advice, with a final report expected later this month. However, Mr Percival said his own work analysing six risk-profiling tools had uncovered some wide and concerning discrepancies in the space.
As part of his study, Mr Percival discovered that a client with a low-risk profile could be given a suggested asset allocation using 35 per cent equities from one provider, and 65 per cent from another.
“That’s quite a big difference and it concerns me – so you need to look at that aspect,” he said.
The Financial Services Authority (FSA), the FCA’s predecessor, conducted a study in 2010 which found nine of the 11 providers at the time were not fit for purpose. As part of recommendations made in its report, some providers had improved, Mr Percival said.
However, he added: “None of them are perfect or are guaranteed to provide you with the right answer to a client’s risk profile in every scenario.
“They generally involve a [suggested] asset allocation for [a chosen] level of risk - and my main concern in how they vary from one provider to the next.”
Referring to the FSA study, Mr Percival said that he thought profiling tools had come a long way but their presence throughout the entire advice process made their suitability towards clients integral, warranting additional scrutiny.
“Back then they pretended to be tools that stood alone in isolation but now they are part of an integrated end-to-end advice process. They all looked at the FSA’s guidance and improved on the back of it – so they have evolved and improved in the meantime," he said.
