Australian Financial Services Licensing (AFSL) Forum


Allow me to answer the question plainly…there is absolutely no obligation under law to complete a risk profiling questionnaire when providing investment advice.
In FoS circular 6 (Winter 2011), it is outlined quite clearly:
“FSPs that provide personal financial advice to retail clients are obliged to ensure the financial products they recommend are suitable having regard to each client’s objectives, financial situation and needs. An important part of an FSP’s assessment of a client’s objectives, financial situation and needs is the knowledge of the client’s tolerance to risk.”
In respect of these tolerances, one need look no further than RG175, specifically 175.125 where the two tolerance tests are 175.125 (d) and (e) 175.125 “
Where advice relates to financial product(s) with an investment component, we consider that the ‘relevant personal circumstances’ of the client will normally include the client’s:
(d) tolerance of the risk of capital loss, especially where this is a significant possibility if the advice is followed;
(e) tolerance of the risk that the advice (if followed) will not produce the expected benefits.
The FoS Circular continues:
“There is no mandated method of risk profiling and a number of methods have been developed by FSPs, including:

  • risk profile questionnaires
  • the risk tolerance line method
  • the life-cycle approach, and
  • the sensitivities analysis approach

Most importantly, FOS notes that:
“FOS also recognises that skilled advisers can secure their clients’ informed consent without using risk profiling tools.”
And finally:
“Regardless of whether risk profiling tools are used or not, FSP’s must keep detailed records that show they secured their client’s informed consent (Ed: and dare I say the emphasis is on “informed”) about the level of risk required to achieve their objectives. Without these records, FSP’s have greater difficulty defending claims involving the adequacy of their risk profiling practices and procedures.”
I sometimes wish FOS had separated or extinguished the last sentence because it glosses past the importance of the prior sentence which is that FSP’s must keep detailed records of the level of risk REQUIRED to achieve goals and objectives. This distinction is extremely important. It is the risk required, not the risk your client is comfortable taking, which is all that risk profiling questionnaires can hope to achieve.

  • Free answers to common Financial Services Regulation (FSR), Consumer Credit and AML/CTF issues.

    Click here to join our LinkedIn group for responsible managers and compliance professionals.
  • Training

    Regulatory Compliance Training for Directors, Responsible Managers and Compliance Staff

    View Courses

  • Legal Advice

    Review your AFSL or ACL disclosure documents, conduct a licensee audit and more…

    Get Legal Advice

  • Compliance support

    The HN Hub – an online platform built to support Responsible Managers and Compliance Staff