Ian Stott, client services director at The Consulting Consortium, explains how the FCA assesses an adviser firm's risk.
The term ‘risk profiling’ means different things to different people. For advisers, it is generally associated with the process of identifying a client’s attitude to risk when considering investment recommendations.
For the Financial Conduct Authority (FCA) and the regulatory supervision of smaller firms falling under the C4 conduct supervision category, however, it means something completely different.
It is clear the FCA remains inevitably focused on what could go wrong: firms or products failing, misalignment of the risk appetite of individuals with the products they are sold, and consumer detriment when lives are affected through failings or misconduct in the financial sector are all possible scenarios.
Risk profiling, but not as you know it…
However, like many organisations, the FCA is challenged with resource issues in terms of personnel. This means it has to focus its attentions on those themes, sectors and firms most likely to negatively influence its objectives of ensuring positive outcomes for retail consumers.
C4 categorised firms are classed by the FCA as ‘flexible portfolio’, which means they are supervised by a team of sector specialists, not a dedicated supervisor. C4 firms are still subject to a ‘touch point’ at least once every four years, which could range from a roadshow, an interview, a telephone call, an online assessment or a combination of these.
The regulator wants to see how firms identify and take action to reduce risks to their business. Only those C4 firms deemed to pose a sufficiently high risk to its objectives will be the subject of further firm-specific work.
Fundamental to the FCA’s risk profile assessments is desk-based research in the form of questionnaires and analysis of the wider datasets submitted via a firm’s Gabriel reporting.
The questionnaire largely revolves around three core elements: governance, culture and controls. In terms of analysis, it is understood the FCA has developed its own risk profiling tool to score firms depending upon the responses provided. These scores, coupled with a wider understanding of the firm, will determine whether it is selected for a visit or called to a meeting at a regional roadshow.
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