Australian Financial Services Licensing (AFSL) Forum

This topic contains 5 replies, has 4 voices, and was last updated by  Michelle Chasser 5 years, 9 months ago.

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  • #2885 Reply

    Is it a compliance requirement to complete a risk profile questionnaire for each client when providing investment related advice?

    #3104 Reply

    Clare McAdam
    Member
    A risk profiling questionnaire aims to uncover your client’s attitude to investing, understanding of financial markets and how they may react during certain investment markets and economic conditions.
    Whether a risk profiling questionnaire is required when providing financial product advice depends upon whether that advice is general or personal advice.
    When providing clients with personal financial advice, that is financial product advice directed to a person, considering the clients objectives, financial situations and needs.  It is required that a complete risk profile is taken of the client. As s945 A of the Corporations Act states that it is required for a provider of personal financial advice to:
    • Make reasonable inquiries about the client’s relative personal circumstances
    • Reasonably consider and investigate the subject matter of the advice
    • Ensure the advice is appropriate to the client
    However if you are providing your clients with general advice, that is all other financial product advice, you are not required to complete a risk profile on your client, as this information is broad in nature and does not relate to clients specifically.  However under section 949A, providing entities , must give a prescribed ‘general advice warning’ when providing general advice to a retail client.
    Regulatory Guide 175 provides more information regarding this.
    If you seek further information, please don’t hesitate to contact our team.
    Author: David Court
    Co-contributor: Clare McAdam
    #3122 Reply

    Outside of Finametrica, has anyone got any really good examples of risk profiling questionnaires?
    Specifically, I am looking for questions around gearing and borrowing to invest.

    #3123 Reply

    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.

    #4612 Reply

    Giorgia Goode

    Do these rules (in particual, best interests duties) only cover retail clients? what about wholesale clients?

    #4614 Reply

    Hi Giorgia,

    Thank you for your question.

    The previous advice based on requirements to have a reasonable basis for providing advice has now been replaced by the best interest duty. The best interest duty is a form of consumer protection and only applies to retail clients.  We refer you to ASIC Regulatory Guide 175 which contains information on these obligations. As wholesale clients are generally assumed to have greater investment knowledge and experience, the provisions recognise that they do not require the same degree of protection.

    Risk profile questionnaires are widely used throughout industry to assist financial providers in understanding their clients’ risk appetite to ensure that advice is appropriate to the client .

    For further information please contact our financial services team.

    Author: Michelle Chasser
    Co-contributors: Joanne Lee and Greta Walters

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