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FCA cautions over use of risk-rated funds
by Jun Merrett on Oct 23, 2013 at 08:16
The Financial Conduct Authority (FCA) has voiced concerns over the use of risk-rated funds, arguing they cannot be used as a short-cut to determine investment suitability.
FCA technical specialist Rory Percival (pictured) said the regulator was concerned about the risk-mapping exercise performed by advisers using the funds.
'One area of concern is this mapping exercise. What is your understanding of the client's risk profile, what is the risk rating of the fund or portfolio and do they map together?
'You need to make sure that it is correct. Unfortunately life is not simple, if you have a tolerance for loss that is a three, and the portfolio is three, that's not necessarily right,’ he said.
'There are other factors you need to think about: capacity for loss, client knowledge and experience and the term of investment. By all means have risk-rated funds but be aware of the context in which they're recommended.'
Speaking at the Defaqto Investment Outsourcing Conference, Percival said that adviser due diligence on investments continued to be a concern of the regulator.
‘It is worth noting that it’s an area of concern for the regulator as it underpins a lot of the problems and crystallised risk in the past,’ he said.
'It's easy to quote Arch Cru and Keydata where firms were not undertaking adequate due diligence around investments they were recommending, they relied on marketing material.
'That is not acting professionally in the best interest of the client.'
He added the regulator was ‘neutral’ over the responsibility for advice where advisers refer to discretionary fund managers (DFMs).
'We're completely neutral as long as the client ends up with the right outcome,’ he said, arguing it was up to the adviser and DFM to decide who takes what responsibility and make it clear to the client.
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