What does the FCA say about the use of risk profiling and asset allocation tools?

17 March 2021

The FCA’s current emphasis on risk and suitability was firmly established in the key guidance consultation paper FCA GC 11.01 (2011): Assessing suitability: Establishing the risk a customer is willing and able to take and making suitable investment selection.

At the time of publication, the FCA’s view on the competent use of risk profiling tools was scathing. Between March 2008 and Sept 2010, it reviewed 366 cases and more than half of them – 199 – failed “because the investment selection did not meet the customer’s attitude to risk”. Having identified a client’s appetite for risk, the advisers were unable to select an appropriate investment.

The FCA uses the phrase “willing and able to take” as shorthand for risk due diligence. In the key guidance consultation paper’s findings, the principle failure in making an adequate risk assessment is not the ability to assess a client’s risk profile but the failure to “take appropriate account of their capacity for loss”, including highlighting customers who should be in cash deposits because they are “unable to accept the risk of loss of capital”. The paper also highlights the role of inflation as a risk, because of its ability to “erode the value of capital”.

The challenge that the paper presents back to advisers is to understand their tools with their limitations, and to ensure that each part of the suitability journey is effective, accurate and, most importantly, correctly aligned. The paper underlines that “firms remain responsible for assessing suitability, including assessing the risk a customer is willing and able to take, even when using tools”. It warns that, in further action: “We will be looking to see how firms have acted on this report. We will consider, for example, whether firms have robust procedures, tools and risk category descriptions (where used) to establish and check the level of risk a customer is willing and able to take, as well as assessing the suitability of investment selections.”

This article is a snippet taken from Synaptic’s free guide on what firms need to know about risk. You can download your copy here.

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