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.