Firms will get help from the regulator to set-up automated advice models to service consumers who have been abandoned by the existing advice system, under recommendations in the Financial Advice Market Review report.
A “dedicated team” at the FCA would help bring robo-advice to the mass-market more quickly, the report out today (14 March) said.
It suggested harnessing technology could help drive down the cost of advice through economies of scale, making it more accessible to those with smaller pots of savings and lower incomes.
The report made clear that where an automated advice service provides a personal recommendation to a client it must adhere to all of the regulated advice rules.
But it made a number of recommendations to help firms develop more ‘streamlined’ services and allow for less strictly regulated guidance-only - without a personal recommendation - offerings, which is expected to benefit firms seeking to enter the automated guidance market.
Currently the advice market delivers high-quality solutions to those who can afford full advice, the report - which has been seven months in the making - said, but it highlighted that not everyone wants or needs a personal recommendation for every decision.
“It is clear, though, that people would often like more support in understanding the options that are available to them,” the report reads, recommending consumers should be able to access advice on a more limited basis.
However, it emphasised that the costs of providing face-to-face advice are significant, meaning most firms are unable to provide advice at a price many consumers would consider reasonable.
FAMR believes new technologies can play a “major role” in providing cost-effective advice for millions of people.
In the wake of the Retail Distribution Review, firms had to ensure the charges for their advice cover the costs of providing that service, and not unreasonably cross-subsidise these costs from other areas of the value chain, such as their products.
However, those responding to FAMR suggested these rules have reduced the flexibility for firms to develop business models aimed at those with less wealth, because firms are unable to cross-subsidise during the first few years of the business, when business costs are not being recovered on a standalone basis.
Some firms also suggested the direct impact of this has been that firms have to charge a higher fee for advice to ensure that the business model makes economic sense.
Large firms said this was a particular barrier to developing automated services for the mass market, which has significant upfront costs.
A number of respondents suggested some flexibility in the existing cross-subsidisation rules would be helpful in allowing them to develop business models to provide advice to consumers with less wealth.
Other recommendations for the FCA included:
• Producing new guidance to support firms offering ‘streamlined advice’ on a range of consumer needs.
• Supporting firms offering services that help consumers making their own investment decisions without a personal recommendation, with illustrative case studies highlighting the main considerations firms need to take into account when developing such services.
• Building on the success of Project Innovate and establish an Advice Unit to help firms develop their automated advice models by stepping up engagement with international regulators and actively engaging with large incumbent institutions.
In January, the head of the Financial Conduct Authority’s Project Innovate - an initiative to help create competition and growth in financial services - said more needed to be done to help large regulated companies get into fintech.
Financial regulators in the European Union are also currently scrutinising the robo-advice industry, which could also tie into changes set out by FAMR.
katherine.denham@ft.com
