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Advisers call on the FSA for clarity on capacity for loss
by Jun Merrett on Nov 28, 2012 at 10:47
A recent survey has revealed that many IFAs find the regulator’s guidance on how to assess and record investors’ capacity for loss unclear, so focus only on attitude to risk.
Advisers have called for more guidance from the Financial Services Authority (FSA) on assessing client capacity for loss, as a new survey shows the majority feel they have been left in the dark by the regulator.
The FSA has raised concerns that advisers are not properly taking into account capacity for loss, claiming in its 2011 guidance paper on investment suitability that some IFAs were ignoring the issue and focusing only on attitude to risk.
But advisers have argued the regulator needs to give more detail on what it expects from firms, with 73% respondents to a survey conducted by fund group Architas calling for clarity.
In its 2011 paper, the FSA said only that it expected advisers to have in place a ‘robust process’ for assessing investor attitude to risk, and said an example of good practice was one where risk attitude and capacity for loss were assessed separately.
Only 17% of those surveyed said the FSA’s guidance was clear, while 12% said they had not paid much attention to the recommendations.
Chris Hannant (pictured), policy director at the Association of Professional Financial Advisers, said the figures were ‘alarming’.
‘It is a substantial number and I would have thought [assessing capacity for loss] would be a touchstone that you come back to quite regularly because it might change,’ he said. ‘If you’re having a proper advice session, you cannot have that without discussing capacity for loss.’
However, he argued that many advisers may be adopting the right processes but failing to document it properly.
‘I wonder if it’s done implicitly rather than explicitly? The worrying thing for me is if the FSA says you’ve got to do this, and you can’t document or prove it [because you might not understand what you do specifically as a capacity for loss process], then you’re potentially for the high jump when things go wrong.’
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