The Financial Conduct Authority (FCA)’s multi-firm review of automated investment services raises many questions about the future direction of robo-advice. How will such firms address the areas the regulator says some are falling short on?
What does this mean for the future of robo-advice? Is there a need for a separate Financial Services Compensation Scheme (FSCS) levy class? Traditional advisers are not going to want to bail out their robo advice competitors.
Importantly the regulator is making it clear there is a level playing field between traditional and emerging advice models. While the latter may benefit from wider access to the regulator, they still have to work to the same high standards.
The additional access given to new entrants benefits the regulator and consumers, as well as those organisations. It provides the FCA with early access to how these firms are thinking and evolving. This is not just a one-way street. Despite expectations at the time of the Brexit referendum, the UK continues to have a substantial leadership position in all areas of FinTech. I am in no doubt that providing a positive and encouraging regulatory environment plays an important role in this.
With higher professional standards and the burden of increased regulation/disclosure, traditional advice has become unaffordable for tens of millions of consumers. There is a clear need to find new ways to help them get the advice and guidance they receive, but this cannot, indeed it must not, be at the price of a lower level of consumer protection.
In their analysis the FCA calls out a number of areas where they expect automated advice firms to do better. Reading these gave me a definite feeling of déjà vu. Many of the issues being raised with robo-advisers now are the same as were raised with IFAs in 2011 and wealth managers in 2015.
Personally I am not surprised by the FCA’s conclusions. On several occasions I have been staggered by the level of ignorance of FCA rules and requirements among senior people within some of the earlier robos. There is no shortage of information available, but they need to recognise what is expected of them, not assume rules do not apply because they are inconvenient.
- The FCA has been critical about failings of a number of robo-advisers
- Questions are being asked about whether there is a need for a separate FSCS levy class for robo-advice
- Automated advice has to be treated to the same scrutiny as traditional advice
The report raises concern about firms not adequately addressing capacity for loss. There are obvious synergies for robo firms with the emerging Open Banking services, which could address such areas in the same way as traditional advisers increasingly use cash flow planning tools for this purpose.
Work being put in place by firms like Moneyinfo, Money Dashboard and Emma could be adapted to address these issues relatively easily and without interrupting the flow of automated advice. I can see many ways in which building Open Banking into automated advice could facilitate other advice processes and additional consumer benefits.
Other issues called out included stress testing and cyber security and the need to review outcomes, including if adequate testing has taken place and action to address unsuitable recommendations. In other guidance and consultation on suitability, the FCA has on several occasions provided examples of what it considers good and bad practice where it has seen it. It would have been particularly helpful if similar examples could have been included in the recent study.