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Status: You are viewing the version of the handbook as on 2005-06-30.

SIFA 9.10 Assessing your customer's understanding of risk

SIFA 9.10.1G

When you conduct investment business for private customers, you must ensure that you take reasonable steps to ensure that they understand the nature of the risks involved with the transaction ( COB 5.4.3 R).

Why do you have to assess your customer's understanding of risk?

SIFA 9.10.2G

You will want to sell products or services that are suitable for your client's risk profile. This is so that they are happy with the service that you provide them but it is also a vital part of the 'know your customer process'.

SIFA 9.10.3G

Assessing your customers' understanding of risk will help ensure that you meet the requirements set out in the following Principles:

SIFA 9.10.4G

Principle 7 (Communications with clients) requires you to pay due regard to the information needs of your clients and to communicate information to them in a clear, fair and not misleading way.

SIFA 9.10.5G

Principle 9 (Customers: relationships of trust) requires you to take reasonable care to establish the suitability of advice that you give.

SIFA 9.10.6G

You must establish what each client considers an acceptable level of risk to be for him or her and advise him or her on that basis. When you have a clear understanding of your client's attitude to risk (i.e. whether they are risk averse or willing to take some degree of risk) you will be in a better position to recommend suitable products.

Where is the relevant section in the Handbook?

SIFA 9.10.7G

The requirements for assessing your customer's understanding of risk and providing risk warnings are set out in Section 5.4 of COB.

SIFA 9.10.8G

COB 5.4.3 R refers to the general requirement for an adviser to assess a private customer's understanding of risk for any personal recommendation. Special risk warnings apply in addition for:

  1. (1)

    warrants and derivatives ( COB 5.4.6 E);

  2. (2)

    retail securitised derivatives ( COB 5.4.6A E);

  3. (3)

    non-readily realisable investments ( COB 5.4.7 E);

  4. (4)

    penny shares ( COB 5.4.8 E);

  5. (5)

    securities subject to stabilisation ( COB 5.4.9 E); and

  6. (6)

    stock lending activity ( COB 5.4.10 E).

Other considerations

SIFA 9.10.9G

Your client may have different attitudes to risk for different products. You should not assume that they would have the same attitude to risk for all of their financial planning needs.

SIFA 9.10.10G

The following sections are also relevant:

•'Clear, fair and not misleading' - Chapter 9.2 of this Overview;

•'Know your customer' - Chapter 9.8 of this Overview;

•'Suitability' - Chapter 9.9 of this Overview; and

PRIN 2.1 in the Handbook.