It’s not the regulator’s job to tell advisers what tools to use, it’s up to advisers to decide the most appropriate tool for assessing suitability. David Roberts provides a handy checklist to help the decision-making process.
For some time, the regulator has made announcements on risk profiling, the use of attitude-to-risk profiling tools and failings. In the regulator’s most recent opinion, advisers ignore capacity for loss. This theme dates back a number of years to the FCA’s predecessor’s thematic review of 2010.
The response from advisers to the regulator’s announcements is to “Tell us which ATR tools are good and which ones are bad”. Whether the regulator is correct and wise, or perverse and unhelpful in not responding will depend on one’s position. Regardless, the regulator just keeps schtum on the matter.
Personally, I do not consider it unhelpful or perverse. ATR risk profilers are just a tool, no more and no less. Does the regulator tell you whether to drive an Audi or a Toyota? Whether to use a Microsoft PC or an Apple Mac? It is not the regulator’s job to tell advisers what tools to use.
Investor suitability is enshrined in the FCA’s Codes of Business Standards (COBS9). Much like the Highway Code, it tells advisers what they should do in delivering their services to their clients and the documents and records that they should keep to demonstrate that they are exercising their advice diligently. The Highway Code is a useful parallel.
The Highway Code doesn’t give guidance on whether we should drive a Ford Ka, Audi A6, Skoda Octavia or even an Aston Martin Vanquish for our day-to-day running around. Neither does it recommend when we should drive an estate car, a van, a refrigerated articulated truck or even a motorcycle and sidecar! Thankfully, we are left to our own personal choice in this matter and long may it stay this way.
If the parallels between the FCA’s Codes of Business and the Highway Code are valid, then we can agree that it is up to advisers to decide the most appropriate tool for assessing suitability. I purposely use the term assessing suitability rather than risk profiling as COBS 9 is all about suitability, not risk profile, a term that is mentioned only once.
Rather like trying to use a Ford Ka to transport the contents of your home, using the ‘wrong’ tool means advisers will have to expend more effort ensuring that he or she operates within the Codes of Business.
So for those who want the regulator to tell them which ATR tool is ‘good’ and which one is ‘bad’, do yourself a favour, brush up on COBS 9 and analyse your on-boarding and suitability process; here’s a helpful checklist:
|Does my firm’s suitability assessment process and ATR tool record ask, document, record and retain records for the following as expressed in COBS9?||Yes||No|
|Client investment timescales|
|Capacity for loss|
|Income requirements from the investment|
|Investment timescales and horizons|
|Understanding of and sensitivity to inflation|
|Knowledge of financial matters and sophistication|
|Understanding of and attitude to investment risk|
|Records variance between a suitability rating and the recommended portfolio|
If you’re inclined to demand that the FCA tells you which ATR is good and which ones are bad, just remember that the FCA is ambivalent. Moreover, be grateful that the Secretary of State for Transport allows us the freedom of choice to exercise one’s judgement in what we drive – the world would surely be a rather boring place!