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.
Key Points
- 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.
Although Project Innovate and the advice unit at the FCA have done great work, I think it is fair to say that not enough has been done to share what has been learnt with the wider industry. Given the concerns the FCA has identified in this study, it would be very helpful if more information were now published.
The challenges raised over the combined effect of Mifid and Priips will inevitably be complicated further by the emerging requirements of the product intervention and product governance sourcebook. These are issues the whole advice industry is struggling with. It would be unfair if these challenges were solely focused on automated firms. In my experience the combined effect of the various regulations, or lack of it in the case of pensions, is causing confusion among advisers and investors alike. This is undoubtedly leading to poor customer outcomes, but that is not an issue the automated sector or all advisers alone can resolve.
This could be a good opportunity for traditional and innovative firms to find a common cause to work together on, but the regulator also needs to help find a solution. It must be unusual for the FCA to find itself having to work out what it expects from firms meeting another organisation’s rules, in this case the European Securities and Markets Authority (ESMA), but with the current situation causing real confusion for consumers, this is not an issue where the FCA can just sit on the side lines.
If all is not well in robo land, what does this mean for the wider industry? I remember suggesting robos should make higher contributions to the FSCS at an Innovate Finance event a few years ago. Many robos are start-ups and a high percentage of start-ups fail, leaving their liabilities for any poor advice given to the FSCS, so they represent a higher risk.
The idea did not go down well with some. The chief executive of one very well-known robo was horrified at the idea, arguing it would constrain the number of new entrants. This is true, but is it fair for new entrants to be subsidised by existing players? I still believe this issue should be explored. Perhaps all start-up firms should for an initial period make higher FSCS contributions? Equally, given their higher risk of poor advice being systemic, should all robos pay a higher levy on an ongoing basis?
Advisers must be unhappy at the prospect of having to fund the new Single Guidance Body and the Pension Dashboard, both of which are now being designed by politicians to compete with them. Should they also have the burden of subsidising the competition?
Automated advice has an important role to play in making advice affordable and accessible to all consumers, not just the wealthy. It will be a key component in enabling advice firms, old and new, to attract new customers. At some stage we need to start thinking of robo advice and automated services, not as a separate activity, but part of how the advice industry is changing. All the above issues will contribute to this debate over the next few months.
It is unlikely we have heard the last from the FCA about how they plan to regulate robos, so it is time for everyone in that market to make sure they are doing everything they need to meet the high standards for advice.
Ian McKenna is director of F&TRC
