The fact the regulatory and common definition of ‘advice’ do not coincide continues to be a source of confusion to consumers, according to the Financial Services Consumer Panel.
In its response to the ESA’s joint committee discussion paper on automation in financial advice, the consumer panel’s chair Sue Lewis said whether a service constitutes regulated advice is of crucial importance in ensuring consumers make well-informed purchasing decisions.
She pointed out automated services offered online, which are merely platforms for transacting a sale, such as many price comparison websites, “can masquerade as advice providers”, without having any liability for the decision taken by the customer on the back of their recommendation.
The panel’s view is automated advice should be subject to the same standards as other forms of financial advice.
“Advice is either regulated or it isn’t, and providers should make this clear to customers up front,” stated Ms Lewis.
“If the advice is not regulated, there should be a clear warning to consumers that, if they buy a product or otherwise act on the advice, they have no recourse to alternative dispute resolution or redress.
“This will bring much needed clarity to the market, especially giving rapid growth in the provision of automated advice services,” she added.
In December, the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority, issued a discussion paper on automated advice.
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.
While the panel accepted the use of automated services to deliver advice could reduce costs to both firms and consumers, “we have not yet seen any convincing evidence that costs for traditional delivery methods for advice are causing gaps in the availability of advice to different groups of consumers”.
It added the potentially lower costs come at a price identified in the discussion paper: where advice is fully automated, limitations inherent in the design of the advice process with no, or very limited, human intervention may result in inappropriate recommendations to the customer, potentially resulting in mis-selling.
Finally, the FSCP suggested that in the UK, the evolution of automated advice will feature the entry into the market of the country’s large retail banks.
“The concern is that high street banks view automated advice as a route back into mainstream advice, providing a cheap, low liability way of distributing their own investment products,” read the response, adding that “the history of investment mis-selling by those banks raises concerns over the potential for serious and widespread consumer detriment”.