European and US regulators are taking a closer look at potentially incorrect risk tolerance assessments made by automated advice technologies.
Back in December, the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA) issued a discussion paper on automated advice.
The paper pointed out the consequences of incorrect assessments are not just an issue for ‘robo-advisers’ but for all those giving financial advice.
But because of the potential risks and benefits of advice based on computer algorithms, rather than human decision making, the authorities asked for industry input to find out whether they should intervene with regulation for robo-advice.
Paul Resnik, director of risk-profiling firm FinaMetrica, welcomed the scrutiny but expressed disappointment at the paper showing “no awareness” of the role of risk tolerance.
Speaking at a conference at the end of January, the US Financial Industry Regulatory Authority’s (Finra) surveillance director Dawn Calonge said she had been asking firms about the controls they have in place.
Specifically Ms Calonge said questions are being asked about the consideration of client risk tolerance before placing them in a robo account.
Her comments followed a joint alert by Finra and the US Securities and Exchange Commission (SEC) last May that, amongst other things, pointed out automated tools may rely on assumptions which could be incorrect, or do not apply to an individuals’ situation.
Bruce Moss, eValue’s strategy director, said that just as in the UK, there is also a regulatory requirement in the US to know your customer and to ensure the suitability of recommendations, but he added that “without exception US robos adopt a very light touch approach”.
peter.walker@ft.com
