Risk Mapping

FCA technical specialists have stated that they are concerned that advisers are not undertaking a thorough risk mapping process when recommending risk rated funds.

For example, if your ATR assessment grades a client as a ‘3’ and the risk rated fund or portfolio is also a ‘3’, that does not necessarily mean that there is a match or correlation.

The FCA expects firms to include wider factors in the ATR assessment process, such as capacity for loss, client knowledge and experience, and the term of investment. They state that they have no problem with advisers using risk rated funds, but they must be aware of the context in which they’re being recommended.

Due diligence on investments continues to be a concern for the regulator. They quote Arch Cru and Keydata as examples where firms were not undertaking adequate due diligence about the underlying investments but relied on marketing material. In this respect there is a very interesting FOS case here where the ombudsman found in the client’s favour for this very reason.

It is crucial therefore that you fully understand the fund or portfolio’s risk so that you can ‘map’ your ATR grading to a fund or portfolio that has a corresponding risk rating. This will require due diligence on the funds e.g. what are the underlying investments?

The FCA states that where insufficient due diligence is being undertaken then (quote) ‘That is not acting professionally in the best interest of the client.’

Finally, with regards to the use of discretionary fund managers (DFMs), the FCA stated that the regulator was ‘neutral’ over the responsibility for advice where advisers refer to DFMs.

‘We’re completely neutral as long as the client ends up with the right outcome,’ adding that it was up to the adviser and DFM to decide who takes what responsibility and make it clear to the client.

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

This is on the FCA’s ‘hot topics’ list and cannot be ignored. They will be undertaking further review and investigations over coming months so expect to see more in the press.

Due diligence is, by definition, complex and time consuming. There is scope for some outsourcing, but let’s be entirely clear here, ultimate responsibility rests with the firm, and hence ownership and responsibility lies with the firm’s principals.

Action Required By You

We would go as far as to say that it is critical that you have a thoroughly documented and consistently applied Investment Process. An integral part will be your due diligence procedures and we recommend that you review these objectively in light of this article.

ATEB is working with all clients to ensure that their investment process is well documented. As we have no ties to any third party and are acting only on your behalf, we can provide a fully objective and independent assessment of your due diligence processes. Please speak to you ATEB consultant or contact us for more information.

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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.

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