Risk Indicators: Don’t Pay Twice for the Same Thing

Risk Indicators: Don’t Pay Twice for the Same Thing

The Product Risk Indicator from SIX closes a gap in the risk rating of certain asset classes. With this easy-to-understand method, banks receive exactly the data they need, no more and no less.

In the world of finance, you are only ever as good as the information available to you. Fortunately, financial institutions have started to realize this, and financial professionals have higher expectations of their data. Now they need to make sure they’re asking for higher quality, greater reliability and better insight, not simply greater volumes.

Summary Risk Indicator (SRI) versus Product Risk Classifications (PRC)

Risk ratings such as the Summary Risk Indicator (SRI), which is the mandatory indicator in key information documents for packaged retail and insurance-based investment products (PRIIPs), are on the rise across the industry. They help companies cope with increasing investor protection requirements.

Yet there are still gaps; there is no risk rating prescribed for equities or bonds. The mistake many are making, however, is simply to throw masses of data at these gaps to ensure all holes are plugged and any potential compliance concerns are avoided.

Historically, this has been the role of Product Risk Classifications (PRCs), which calculate risks for all possible asset classes. But with the SRI already covering PRIIPs, financial institutions have been paying dearly for data double-ups. This doesn’t serve any additional purpose when it comes to compliance. They have also been putting themselves at a critical disadvantage by juggling two different indicators for SRI products. Even minute differences between the two methodologies have the potential to create huge confusion.

An Easily Understandable Risk Indicator

To help financial institutions clear the double-data headache and avoid paying for essentially the same information twice, SIX has introduced the Product Risk Indicator (PRI). With the PRI, SIX implements an SRI-based methodology adapted for non-PRIIP asset classes. Each indicator is determined by a market risk and credit risk measure before being given an overall PRI score of 1 to 7. This methodology, which is both simpler and more prescriptive, means that risk is more easily understood and validated by potential clients. Moreover, it already has market backing due to its ties to the live indicator SRI.

With the PRI from SIX, banks are able to compare the risk of investments across different asset classes, choose and recommend suitable investments to their clients, and explain the risks in an intuitive and easily understandable manner. They are also able to provide greater value to investors, all thanks to the lower cost approach of only filling gaps where necessary, and the greater consistency afforded by a single indicator.

As with so many things, it is possible to have too much of a good thing. With increasingly high volumes of data to manage, successful financial services companies will be those with the capability to sift through and find only what’s needed. A credible and widely accepted risk score covering multiple asset classes is just the solution for the job.