Advisers warned to give context to ratings

Townsends Business & Corporate Lawyers principal Peter Townsend said that advisers risk not meeting their duty to their clients if they don’t ensure the client is fully aware of what those ratings mean.

“[I]f ratings are discussed, then it is vital that the adviser make the client fully aware of what the ratings actually mean and how they can be used in assessing the product,” Townsend said.

“To do otherwise is to run a material risk of failing to fully meet the adviser’s duty to the client.”

Mr Townsend said the use of ratings in selling financial products is likely to be in decline since its usage was blamed as a factor in the global financial crisis (GFC).

But he said that it’s important to remember that ratings are “a tool, not an excuse.”

“Given that the ratings agencies are under attack since the GFC for the questionable quality of their rating of various exotic products, the use of ratings as a sales tool may be in decline,” Mr Townsend said.

He added that advisers need to ensure they are not using ratings to suggest that products with similar ratings have similar risk profiles.