Rules for robo-advice include recommendations have to be suitable and of an appropriate risk, and you must know your client and treat them fairly.
Robo-advice generally sits under the definition of simplified or more accurately restricted advice, says Nick Eatock, founder of Intelliflo.
Mr Eatock says the regulator has described this advice as the provision of personal recommendations where the firm sets out the limited nature of the service either face-to-face, on the telephone or electronically.
In this sense the regulatory requirements for ‘robo-advice’ are no different to those for human-advice within a restricted offering.
Ben Goss, co-founder and chief executive of Distribution Technology, says in terms of any review of robo-advice rules it would be very difficult to have one risk/suitability model for your face-to-face business and another for digital, for example.
As with face-to-face advice, Mr Goss says there must be an adequate level of disclosure.
Fees need to be agreed in advance and cannot be subsidised by the product sale. The company must have a sustainable commercial model.
Mr Goss says currently with robo-advice the rules require an individual adviser is responsible for the advice.
He says: “Just because advice is delivered digitally doesn’t mean the firm or individual adviser is not responsible. Advice models needs to be constructed or signed off by a suitably qualified individual or team.”
What is interesting to note is the Financial Conduct Authority (FCA) is on record as supporting online advice - outlining it as an option to bridge the advice-gap in the Financial Advice Market Review - and is encouraging the development of robo-advisers.
Harriet Baldwin, economic secretary to the Treasury, said back in September 2015 that a start-up that wanted to enter the automated advice space was told it would have to ask consumers 247 questions to currently comply with regulation.
Ms Baldwin said both the government and regulator have promised to develop a ‘sandbox’ for innovation in this space.
Speaking at the FCA’s ‘robo-advice’ conference, Ms Baldwin said the ‘sandbox’ could be a “safer space” for firms to experiment with ideas for consumers without the full burden of regulation.
She said: “Once this is up and running it could help test potential ‘robo-advice’ models.”
Advisers considering opting to offer robo-advice should note the Financial Ombudsman Service (Fos) sets a high standard to be met by robos in decisions that it hands down.
Fos wants robos to give comprehensive advice that reflects ‘informed consent’ and ‘suitability’, says Paul Resnik, director of investment suitability experts FinaMetrica.
But robos are not good at being comprehensive, warns Mr Resnik.
He says they essentially categorise people and match the person-category to an investment-strategy category.
On many readings of the Fos findings, that is not enough to avoid sanction, Mr Resnik notes.
Mr Resnik says: “People pay attention to Fos because if a provider finds themselves there it can end up compensating aggrieved investors and wearing reputation damage.
“Amendment to long tail liability obligations and express regulation of limited advice would rapidly speed up the development of robos to meet the UK’s advice gap.”
