ATR vs capacity for loss: the difference files get wrong
Attitude to risk and capacity for loss are two distinct COBS 9 elements — and files routinely run them together or reverse them.
Attitude to risk is the client's willingness to take risk, recorded and consistent with the recommendation. Capacity for loss is their ability to absorb a loss — the impact a loss would have on their standard of living, against their actual circumstances (COBS 9.2.2R).
The common reversal: a client with a high appetite for risk is assumed to have high capacity for loss. They are different things. A comfortable investor with no disposable income to absorb a fall can take risk but cannot bear the loss.
The rubric's capacity-loss pass criteria require the impact of a loss on the client's standard of living to be shown — not merely concluded. A file that documents both, distinctly, is a file that holds up.
What the FCA says about risk and capacity for loss
COBS 9.2.2R requires a firm to seek information on the client's attitude to risk and capacity for loss before recommending. The FCA's Consumer Duty pages add the wider expectation that advice must not cause foreseeable harm — treating risk appetite as proof of loss capacity does exactly that.
In Enforcement Watch 2 the FCA describes firms whose advice could not be shown to fit the client's circumstances. The two tests, recorded separately with the numbers, show the fit.
The two questions a file must answer separately
Attitude to risk is willingness; capacity is survivability. Each needs its own evidence.
| The question | What it tests | The file evidence |
|---|---|---|
| What risk can the client take? | Willingness, from a questionnaire or recorded discussion. | The ATR result, and a recommendation consistent with it. |
| What loss can the client absorb? | Ability, from income, expenditure and savings. | The capacity test, with the numbers it used. |
| What does the downside do to them? | A defined fall against that capacity. | The fall illustrated against their standard of living. |
Worked example: the same client, two records
Before
“Client has a high risk attitude. Capacity for loss: medium.” Two conclusions, no test behind either.
After
The questionnaire result: risk profile 5 of 10, date recorded. Capacity tested against income, expenditure and savings: a 20% fall would reduce income-producing assets by £18,000, roughly two years of discretionary spending. The recommended portfolio's modelled worst-year drawdown, 12%, sits inside that capacity. Two tests, two answers, one recommendation both support.
Common mistakes in risk and capacity files
- Treating the two tests as one. “Risk profile and capacity: medium” answers neither question.
- Concluding capacity without testing it. A capacity conclusion needs the numbers it was reached from.
- Quoting a questionnaire result with no date or version. An undated score cannot be re-tested at the next review.
- Describing a fall without its impact. “Markets can fall 20%” is a caveat. The effect of that fall on this client's standard of living is the evidence.
The five checks before a file is signed
- Attitude to risk recorded from a defined test.
- Capacity for loss tested, not concluded.
- Numbers present: income, expenditure, savings.
- A defined loss scenario with its standard-of-living impact.
- The connection to this recommendation shown.
Related reads
The two tests are Section 3 of the report. See the file review and suitability hub for the full review, the 12-section report anatomy for where they sit, and the annual review process for re-testing them.
Frequently asked questions
Can a client have a high risk attitude and low capacity for loss?
Yes. A comfortable investor with no disposable income can be willing to take risk but unable to bear the loss. The file must record both separately — the recommendation fits the capacity, not just the attitude.
What is a capacity-for-loss test?
It compares income, expenditure and savings, and models a defined fall — for example 20% — against the client's standard of living. The outcome is a number or a band, not a sentence.
What if the client just says they can handle the risk?
Record it, but test it. A recorded questionnaire result plus a cash-flow check carries more weight than a sentence in a file note. The reviewer wants to see how the conclusion was reached.
Your next step
Pull your five most recent files and run the checks. Proven Duty scores exactly this — the two tests recorded separately, with the numbers in the file. Start a free trial or see pricing.