Some advisory firms are failing to adequately assess clients’ capacity for loss - a key element in risk profiling, a former FCA technical specialist has told Financial Planners.

Speaking at the first DFM Due Diligence seminarin the City today, run by online DFM forum Discus and in association with Financial Planning Today, he said this aspect of the advice process has “become really important” and that “there are still problems with some ”risk profiling tools.

Problems existed around approaches to, and understanding, of capacity for loss, according to Mr Percival who said that some risk profile tools might not be up to scratch in this respect.

Mr Percival, who recently left the FCA to begin his own consultancy firm, told the Q&A Panel session chaired by Financial Planning Today editor Kevin O'Donnell that any tool can sometimes come up with the wrong answer - and none are perfect.

He said that he was concerned that the last time the regulator looked at risk profiling tools was some years ago and improvements had only been modest since then. Further improvements were necessary in risk profiling tools to properly capture clients' attidudes to risk and their real ability to suffer loss and understand what that meant, he told the audience.

He said: “if you’ve got very, very clear risk descriptions that give you numbers, graphs, and indicate what that journey might look like… then you can have a meaningful discussion with the clients (and ask) is that kind of journey one you’re happy with or not happy with?”

He identified problems around capacity for loss questions when he was working for the regulator.

@rorypercival taking to the floor at the DIM / DFM event @Discus_uk @bankhall #DISCUSdebates pic.twitter.com/W02bLN8a8V

— Stephen Gazard (@StephenGazard) December 6, 2016

Some advisers misunderstand capacity for loss and think it is just the client’s views but it is not and in fact comes down to numbers, he explained.

He believes that some of the tools and some of the approaches, including questions asked to the client, don’t yet address capacity for loss properly. Some clients may not understand what capacity for loss means without detailed and clear explanation of the impact of loss on their circumstances and future income.

Furthermore, sometimes advisers complete a capacity for loss questionnaire but then ignore the answers in the solutions, he said.

Mr Percival said he has seen files where this is apparent and where firms have ticked the box for asking the questions, but fail to use them afterwards.

He plans to create a guide to risk profiling tools, with an update explaining which ones work, how they work, how to use them and how to utilise them for capacity for loss, “such that you end up with a process which is more robust”.