Investment risk profiling “ineffective”, regulator finds

The Financial Services Authority (FSA) has found that consumer risk profiling is ineffective across a range of investment advice firms.

In its Retail Conduct Risk Outlook, the FSA noted that recent thematic and supervisory work had found ineffective risk profiling.

“The risks around investment advice remain acute in an environment where firms exploit consumers searching for potentially incompatible combinations of high return and low risk,” it warns.

“Consumers may not understand the risks they need to take to achieve potentially higher yields. The potential for unsuitable sales therefore remains high.”

The regulator says it has evidence of consumer detriment as a result of incorrect risk evaluation.

“As a result we are concerned that advisers are selling consumers products and/or services that are not compatible with their risk appetite,” it adds.

The regulator says firms and risk-profiling tool providers tell it they have taken note, although it takes time to make changes, adding: “As such, it is not yet clear that changes are either widespread or effective in reducing the poor consumer outcomes we have observed.”

The FSA says: “We will continue to monitor practice in this area given that it is a current issue causing consumer detriment.”