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Making Sure You Stay Compliant

Pocket Risk is built to be secure and compliant with all regulations regarding risk profiling
in the United States, United Kingdom, Canada, Australia, NZ, India and other jurisdictions.

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“Pocket Risk works. It helped my firm pass a compliance audit.”

Tommie Goggans, Googgans Group

United states b835fbd910caa4f54c9e814f6beff839b7e964f4ec67013fe0d9a2785e1b76b6 United States

Suitability and risk profiling is regulated by the Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission (SEC).

Regulation is primarily governed by FINRA Rule 2111 which states advisors must…

“have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the [firm] or associated person to ascertain the customer’s investment profile. In general, a customer’s investment profile would include the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs and risk tolerance.”

FINRA defines risk tolerance as a client’s “ability and willingness to lose some or all of [the] original investment in exchange for greater potential returns”. This is what is commonly called risk tolerance and risk capacity. With regards to questions and questionnaires FINRA states they must not be “confusing or misleading” and accurate records must be kept when clients complete questionnaires. Advisors are not forced to use a risk questionnaire but FINRA recognizes advisors use such tools as a best practice.

Financial advisors regulated by the SEC are held to the fiduciary standard, meaning they must legally and ethically act in people’s best interest. The SEC provides little specifics on risk profile questionnaires. However, they do say any presentation of data must be clear and not misleading. If audited advisors must have shown due care in recommending investments.

Pocket Risk complies with all regulations and works with Red Oak Compliance to ensure we continue to meet FINRA and SEC regulations as they evolve.

United kingdom f9e3ca3e921e5ce79c10c47df1cda247fb96eb70405ba7806dd07659daffe541 United Kingdom

Suitability and risk profiling is regulated by the Financial Conduct Authority (FCA) formerly the Financial Services Authority (FSA).

The UK has the most prescriptive suitability rules in the world. In 2011 the FSA (now FCA) released “Assessing Suitability: Establishing The Risk A Customer Is Willing And Able To Take And Making A Suitable Investment Selection”. The assessment found that most advisors were not properly assessing client suitability for investment. Their main findings were that…

  1. Advisors were not diligently assessing risk tolerance.
  2. Advisors who were assessing risk tolerance often missed risk capacity and goals.
  3. Advisors were not assessing clients’ investment knowledge and experience.
  4. Advisors were using poorly constructed questionnaires that could sway clients too far into aggressive risks.

Since this paper was released standards for suitability investment have increased. All UK advisors now have to provide a suitability report when recommending investments to clients.

Pocket Risk is compliant with UK regulations.

Canada 07e41f7a926632dbe7927da057b1e226c10f5eff0229d11653e3877f3d20e713 Canada

Suitability and risk profiling is overseen by a group of organisations including Investment Industry Regulatory Organization of Canada (IIROC), Mutual Fund Dealers Association of Canada (MFDA), Investment Funds Institute of Canada (IFIC), The Ombudsman for Banking Services and Investments (OBSI).

Canada has a complex financial regulatory system due it’s decentralized government. Financial regulation happens at the national level and at the province level. However, the responsibility for client suitability has primarily been led by the IIROC and the MFDA.

The IIROC has a series of KYC (Know Your Client) regulations including the requirement to demonstrate a client’s risk willingness, financial ability, time horizon and investment objectives. There is no specific mention of using a risk questionnaire but KYC forms are encouraged.

MFDA has been significantly more prescriptive and has provided a basic “safe harbor” risk questionnaire for financial advisors. They are one of the first regulators to talk explicitly about the need to measure a client’s risk tolerance, risk capacity and risk needs. The questions in the Pocket Risk questionnaire are aligned with the MFDA questionnaire. Jointly these represent a person’s overall risk profile.

Pocket Risk is compliant with Canadian regulations.

Australia 66ef72b50f1a18d8144e93bd7a036c2c64b9fe24974a7ff0c44a68804a42d18f Australia

Suitability and risk profiling is overseen by the Australian Securities and Investments Commission (ASIC) and the Financial Service Ombudsman.

The focus for Australian regulators is that best interests have been applied by Financial Services Professional (FSPs). Professionals must “ensure the financial products they recommend are suitable having regard to each client’s objectives, financial situation and needs. An important part of an FSPs assessment of a client’s objectives, financial situation and needs is the knowledge of the client’s tolerance to risk.” The regulator goes a step further and states FSPs should “educate their clients about risk and reward”.

ASIC and the Financial Ombudsman are supportive of risk questionnaires but state FSPs should not be 100% dependent on their results. They should use their judgement in conjunction with a questionnaire.

Pocket Risk is compliant with Australian regulations.

India cdfa8e04ab0e2e1512375bcfd8d86433ed8de68d70bca2bea79b1619ad5bb3f7 India

Suitability and risk profiling is overseen by the Securities and Exchange Board of India (SEBI).

In 2013 advisor regulations were introduced stating that investment advisors must act in a fiduciary capacity. The client assessment process must take into account “the risk a client is willing and able to take”, including their ability to absorb losses. Any risk profile questionnaire used must be fit for purpose, avoiding misleading language or unclear descriptions. All advisors are required to share the results of any analysis with their clients.

Pocket Risk is compliant with Indian regulations.

New zealand a1acef17de47fc605bf6a539c4788acbe38a089875303cfe740d2e64106504bc New Zealand

Suitability and risk profiling is overseen by the Financial Markets Authority (FMA).

Guidelines for advisers are to exercise care, diligence and skill when advising clients. The FMA Authorised Financial Adviser Code Of Professional Conduct states...

“an AFA must make reasonable enquiries to ensure the AFA has an up-to-date understanding of the client’s financial situation, financial needs, financial goals, and tolerance for risk, having regard to the nature of the personalised service being provided.”

Advisers are only “relieved from the obligation to determine suitability” if a client signs a document stating their wish to opt out. Otherwise all suitability assessments should be documented in writing.

Pocket Risk is compliant with New Zealand regulations.

Other Nations

Pocket Risk has sought to comply with all regulators including the European Union member states, Singapore, Malaysia and Hong Kong. If you want more information about compliance please contact us here.