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.’
Mark Pentelow, chief executive of Essex-based Pacific IFA, said his firm had two independent processes for attitude to risk and capacity for loss.
‘We adopt attitude to risk alongside capacity for loss as best practice and something you should be discussing with clients and documenting,’ he said. ‘You should be [going through a capacity for loss process with clients] anyway as it gives you more credibility as an adviser.’
Gap for guidance
Neil Watkins (pictured above), director at the firm, questioned whether it was possible for the FSA to offer the same sort of guidance on assessing capacity for loss as it did on attitude to risk.
‘Given that assessing capacity for loss is such a bespoke practice and is given to variation, is it fair that we ask for clear guidance? Risk profiling is a scientific approach; it’s maths-based, but capacity for loss is bespoke,’ he said.
But Caspar Rock, Architas chief investment officer, said the FSA could provide further guidance without adopting a prescriptive approach.
‘I’d identify areas that clearly would influence someone’s capacity for loss, for example health, lifestyle, outgoings. You can identify pretty clearly those things without stating you must do anything. But there should be a list of things the advisers should consider when assessing capacity for loss,’ he said.
Karen Barrett, chief executive of Unbiased.co.uk, said more detail from the regulator could spur into action those advisers failing to tackle the issue with clients.
‘If the guidance was more explicit and directional, then we would see the conversations happening,’ she said. ‘I think if the regulator is able to, it should come out with a stronger framework on what it expects.’