How the FSA thinks we should assess ‘suitability’
Professionals – both advisers and discretionary managers – should be interested in anything the FSA says to us about how they assess ‘suitability’ of advice and investment solutions when supervising firms. This makes their recent ‘Consultation Guidance’ paper, ‘Assessing Suitability’, important reading. Judging by the community websites, it is indeed generating interest.
We have some serious reservations about the guidelines. Because this is still a consultation, we set them out in a submission to the FSA. Our summary position in the submission reads as follows.
“We have two key areas of concern:
The full title says it all: Proposed guidance on Assessing Suitability: Establishing the risk a customer is willing and able to take and making a suitable investment selection. The paper gives excessive weight to customer-driven risk preferences, which in COBS 9.2 are properly one part of a set of interdependent factors for suitability. Customers cannot be both the weak people the FSA says they are, with poor grasp of concepts and bad maths, and also rational, consistent and accurate in exhibiting their risk preferences. The new guidance does not explicitly discourage advisers from modifying poor self-diagnosis (one of the most valuable aspects of their role) but we think it is an inevitable general effect, because guidance tends to have the same force as rules in the management of compliance risk. Given our views of customers’ capability generally, we expect this bias to lead to suboptimal outcomes.
We strongly support the FSA’s criticisms in the areas where the evolution of business practices is changing approaches to risk assessment and management, notably risk tolerance profiling and platform-based third-party asset allocation applications. However, there is a lack of clarity in the paper about its intentions. The implication is that a number of processes that are widely relied on are, by their very nature, not suitable. We happen to agree. But there is a lack of clarity about whether the FSA’s intentions are really that radical and what it expects the impact on firms to be. In respect of personal risk profiling, we also point out that the bias to self-diagnosed risk preferences will perversely encourage the use of such techniques, in spite of their inherent weaknesses. This inconsistency needs to be resolved.”