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Percival: 7 months to ensure risk profile tools ‘fit for purpose’
Ex-regulator Rory Percival has warned Financial Planners they have just 7 months to ensure the risk profile tools they use are ‘fit for purpose’.
Mr Percival, a Chartered Financial Planner, stressed that advisers need to take a close look at new rules, which are set to take effect in January through Mifid II, relating to risk profiling.
The former FCA technical specialist has conducted a review of the six most popular risk profile tools and told delegates at yesterday’s Morningstar Conference that “none are perfect”.
He did find, however, a broadly more encouraging picture, compared to six years ago when the FSA said the “level of failure in this area is unacceptable.”
He pointed out that a draft rule in Mifid II related to risk profiling is unlikely to change before implementation in 2018.
He said this required firms to “take reasonable steps to ensure information on clients is reliable, including that risk profile tools are fit for purpose and limitations are mitigated through the suitability process”.
He told Financial Planners: “Sometime between now and January you will have decide whether it’s (your profiling tool) is fit for purpose”.
He warned that it is “a little bit of a mixed picture at the moment” as to whether they do come up to scratch.
Mr Percival has been assessing the most-used tools using an FCA guide to judge.
He revealed that he is still testing the tools and his guide, expected out in July, is not completed yet.
Thus, he is “averse to name and shame at this point”.
Tools so far appeared to be “broadly fairly good” in respect of questions being clearer, compared to the FSA review of 2011, with signs that the creators have “worked hard” to make improvements.
The FCA is concerned about middle answers – whereby clients can say something like ‘I neither agree nor disagree’.
The regulator is “quite rightly concerned” that some clients might not be answering because they are actually in that middle profile but in fact because they don’t understand or are not interested, he said.
In the main, he said tools are providing a quantification of risk which is a “good step but I think it could be better”.
He has seen advice firms doing it better with their own in house profiling questionnaires.
Descriptions are “reasonably good now” among the current crop of tools and the scoring – whether they come up with right answers - is ‘better’ compared to 2011 when the FSA review found 9 of 11 were flawed in this respect.
Mr Percival believes the tools overall have “evolved and have improved in the meantime, that’s all positive. But there’s quite a big but!”
He said that “none of them are perfect” and “none guaranteed to give you the right answer from the client on their risk profile”.
His main concerns were how, from tool to tool, they vary in the respect of suggesting an asset allocation for the level of risk.
At one end of the scale, asset allocation is 30% ‘asset backed investments’ - equity and property – but at the other end of the scale the same person was given 65% in the test he carried out.
He said: “That’s quite a big difference and that concerns me, so have a look at that respect.”
Mr Percival will be releasing the full findings and details of his risk profile review in a guide to be published this summer.