FSA finalises risk-suitability guidelines for advisers

FSA - Setting Standards for Client Risk Assessment

FSA – Setting Standards for Client Risk Assessment

The FSA has finally come out with a best practices guide for financial advisers on assessing client-risk suitability.

In a report published today morning, the FSA issued guidelines on investment fund selection for clients and said many firms are unable to asses client risks properly because they fail to collect client data in the desired fashion.

Its research showed that firms assign improper weightings to answers and often provide poor answer options to their questionnaires, thus wrongly evaluating the client’s capacity to absorb losses.

It cautioned against the prevalent practice of too much reliance on asset-allocation and risk profiling tools and said firms should be aware of the flaws in risk-profile calculating tools.

“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”, the report said.

In January, the FSA warned that 9 out of 11 tools can give ‘flawed outputs’ because of their inherent weaknesses.

“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 current report says.

The current risk-profiling tools are found to be ‘vague’ on many occasions and do not differentiate risk levels adequately, the report found.

“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”, the report said.

The report also expresses concern over the high level unsuitable investment solutions for customers as half of the files it evaluated between March 2008 and September 2010, showed the solutions offered misjudged the amount of risk the client is willing or able to take.

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