Assessment of Risk Webcast

The FCA has published a very useful webcast that gives an excellent insight into the FCA’s thinking about to how firms should be assessing customer investment risk.

You can find the webcast here.

You should take the time to listen to this webcast as it is important. It will allow you to gauge your firm’s risk assessment process against FCA expectations.

Below are some of the key points.

Risk profiling tool/questionnaire:

  • Understand any tool or questionnaire that you use, understand its limitations and don’t rely entirely on the tool;
  • Agree at board level what you want the tool to achieve and how the chosen tool meets those requirements;
  • If the client has zero risk tolerance, don’t use a tool, it is not relevant;
  • Any tool should be easy for the client to understand;
  • Ultimately, any tool is only a guide (or what ATEB calls the ‘guidestick’ or  ‘stick in the mud’);
  • Other factors (over and above any tool) are very important – KYC, objectives, capacity for loss, level of debt, etc.

Risk descriptions:

  • Should put the client in an informed position and hence should be comprehensive, clear, fair and balanced;
  • Should not contain vague language;
  • Poor descriptions can lead to a failure to quantify risk;
  • Don’t  use numbers or heading (e.g. cautious) in isolation – explain what they mean;
  • Caveat any growth statements;
  • Be careful when using income and growth as different risk categories;
  • Avoid jargon – a glossary of terms is a good idea.

Capacity for Loss:

  • This is an objective measure, unlike the risk profile the client is willing to take, which is a subjective measure;
  • This is not just about wealth, but also the client’s objectives e.g. they may want to buy a holiday home at retirement and so will need available funds at that time; 
  • There are numerous ways to assess CFL (e.g. cashflow modelling, questionnaire, well completed asset and liability statements and income and expenditure analysis).

Knowledge and experience:

  • Must be taken into account;
  • Use a questionnaire or build the assessment into the sales process;
  • Must be done right at the beginning of the advice process as it will influence the process from there on;
  • A glossary could be useful.

Delivering recommendations:

  • The FCA encourages firms to have sit-down meetings if possible, else telephone meetings (rather than simply issue the report);
  • This approach allows for stress testing – ‘what do you think you’ve bought’, ‘how much risk do you think is attached to this investment’, ‘why is it appropriate to your needs’? 

Asset allocation:

  • Don’t over-rely on models, amend as appropriate for clients.

Shoe-horning (pre-determined solutions):

  • The FCA sees a great deal of this;
  • The solution must wrap around the client’s needs and match the client requirements;
  • Close isn’t good enough!

Investment selection:

  • The FCA often sees a lack of adviser understanding;
  • Before recommending investments, the adviser must be able to demonstrate understanding;
  • This must be evidenced by T&C – CPD, accompanied visits, etc, and the T&C should take place before any recommendation.

Other:

  • Volatility – this is important, but is only one part of the evaluation process;
  • Advisers must understand the impliactions of concentration and the need for diversification;
  • There can be different risk levels for different investments or products.

Enforcement action:

  • The FCA stress the point that poor assessment of risk could result in enforcement action;
  • This does not only happen against larger firms, smaller firms have been sanctioned (risk assessment is the same for big and small firms);
  • Reading enforcement notices is important and the FCA encourages firms to do so as they contain useful information.

PROCESS, PROCESS, PROCESS:

  • The assessment of risk is a process made up of numerous component parts;
  • The process must be properly aligned and should engage the client all the way through – this should ensure that the cient is much better informed.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

Although there should be no surprises, this is a very useful and well presented webcast. It highlights clearly the key requirements and explains FCA expectations.

It makes it abundantly clear that the risk assessment is a process (not a standalone questionnaire) made up of different component parts – this is something ATEB has been emphasising for years!

Action Required By You

This is a ‘Must View‘ for all IFA firms.

  • Sit yourself down in a quiet room for 40 minutes and take a pen and paper;
  • Test yourself objectively against the FCA requirements and expectations;
  • ATEB clients should discuss any concerns with their consultant.
CREATE BEAUTIFUL
SUITABILITY
REPORTS
TAKE BACK
CONTROL OF YOUR
SUITABILITY REPORT
PRODUCTION
SUITABILITY
REPORTS
WITH FULL
COMPLIANCE
CONFIDENCE
HANDS-ON COMPLIANCE
Helping you to implement solutions
FILE CHECKING
All business cases checked, including DB transfers
Section 166 and
Regulatory Reviews
Extensive S166 experience
Audits and
Health Checks
Need a regulatory check-up?
E-COMPLIANCE
A lighter touch support service
FCA Applications
We have completed 100’s of
Part IV applications
previous arrow
next arrow
Slider

About the Author

Steve is an ATEB Director and has a deep understanding of all matter regulatory, built up over his 30 years + in the industry. With a training background and a technical brain, he overseas numerous complex projects and client implementation work.

Contact Us

Brought to you by

Explore more articles in this category

Other articles that you might be interested in