The issues in the FSA’s paper on consumer investment risk are too important for a three week consultation, says Ian McKenna, director of the
Finance & Technology Research Centre
I am naturally wary of calling the FSA’s guidance consultation document – Assessing Suitability – one of the most significant regulatory statements of the year just yet, but it must be amongst the front runners. Overall, it leaves me with mixed feelings.
This is a hugely important subject. Those engaged in the corporate market could be forgiven for thinking that such statements are primarily the concern of those who give individual advice. In practice, the requirements warrant detailed scrutiny by anyone who will be delivering employee-related services.
The workplace environment has the potential to become the dominant delivery channel for all but the wealthiest consumers. That said, there are not enough qualified advisers to address all the employees who need advice, even if they could afford it, working face-to-face.
With the EU increasingly challenging the future of execution-only business, there is a need for some form of suitability assessment to be carried out, even for remote or self directed investments. On this basis the FSA views on this subject must be essential reading.
An increasing number of firms have embedded risk profiling tools in their processes, an approach that the FSA recognises in its paper has the potential to provide structure and promote consistency. These firms will need to ensure there are suitable checks and balances in place to ensure such processes are fully robust and address all the additional issues the regulator has now identified.
The language used by the regulator is aggressive. It says it expects to see improvements in standards and will take tough action where it identifies poor practice. I read this as a requirement for all firms to review their current processes around understanding customer attitude to risk and the suitability of products.
The document has already triggered a detailed review in my office of the benchmarks we apply when reviewing any systems designed to achieve this.
It is too early to understand the conclusions from our review. I expect that many of the systems in the market will include the necessary
Checks and balances, although perhaps not in the format that the FSA now expects to see them, but others may have serious shortcomings.
Given the FSA identified possible shortcomings in nine out of the 11 tools it has examined I would imagine most firms will need to carry out some review of processes and there are a number of areas, for example affordability and capacity for loss, that may warrant significant changes.
Given the forceful position the FSA has chosen to adopt in looking for improvements, the industry deserves longer to respond. Without such consideration it is hard not to question their
The point I find most disappointing of all about the whole paper is the very limited timeframe that has been given for responses – just three weeks! Whilst I totally applaud the FSA for starting this discussion, such a short time period simply does not allow sufficient time for the issue to be fully explored.
A cynic might suggest the regulator is trying to stifle debate. I will be more generous and suggest that the FSA has misunderstood the importance of this issue. We need to have a big debate about this. If as a community we are not able to agree the right ways to understand consumers capacity for risk and the suitability of product, we run the risk of having processes that are fundamentally flawed. If the FSA cannot get this one right it is accepting it will fail on one of its key regulatory objectives; securing a suitable degree of protection for consumers.
Ideally the FSA should extend the deadline for responses; perhaps a compromise would be to put in place some interim guidance whilst the issue is explored in detail. As other commentators have pointed out the sample of cases reviewed is relatively small and they actually all appear to come from cases that were otherwise under review.
Achieving better outcomes for consumers ought to be one of the key objectives for the regulator, government and the industry. If we cannot have a robust process for understanding suitability the chances of improving changes must be seriously undermined.
Given the forceful position the FSA has chosen to adopt in looking for improvements, the industry deserves longer to respond. Such a hostile approach might be more appropriate had the regulator taken longer to engage with the industry and explore all the perspectives in what is a complex issue. Without such consideration it is hard not to question their motives.
In reality good practice and reasonable standards in these areas should evolve considerably over time. As an industry we fail for the most part to take advantage of the increasing body of knowledge that the science of behavioural finance can make available. The FSA should make this the beginning of the discussion, not the end.