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In a keynote speech at the QE11 Conference Centre in May, Nausicaa Delfas, the FSA's head of conduct risk lambasted the poor design and use of investor risk profiling tools. The keynote speech followed the publication of the FSA's snappily titled Finalised Guidance: Assessing Suitability, Establishing the Risk a Customer is Willing and Able to Take and Making a Suitable Investment Selection, which was published in March 2011.

In reviewing the failings that the FSA had uncovered in assessing customer risk appetite, the FSA looked at how firms established and checked retail customers' willingness to take risk; the potential failures to provide investment selections that meet acceptable levels of a customer's risk; and the roles played by risk profiling and asset allocation tools.

One area that stood out for criticism was the over-reliance on a 'tick box' approach where no professional judgement is exercised and profiler questionnaire ambiguity means the customer and advisor are operating on different assumptions leading to a mismatch of risk acceptability. Another aspect is the increasing adoption of automated tools that replace more traditional 'know your customer' approaches.

Ms Delfas' speech highlighted customers' reliance on investment and wealth management firms saying "customers come to you because they want to rely on your professional judgement and expertise - they do not expect you would abdicate that professional responsibility, or provide little further value than they would get from filling in an automated tool on the internet."

Before closing her speech, Ms Delfas described the range of fines and customer redress levied to firms such as Barclays, Norwich & Peterborough, The Matrix Group, Standard Life and Tenon - no doubt to encourage, presumably an FSA euphemism for threaten, firms into action to implement improved risk profiling processes and tools!

© Amatica 11/06/2011