Robo-guidance or electric dreams?

Naïve? Undoubtedly. A far-distant dream? Probably. Let us face it, we are a long way from that: we work in a serious industry that needs serious people writing a serious amount of rules and principles – and guidance.

Which all costs – of course – a serious amount of money. So we tie ourselves up in knots and then all get together on a regular basis at industry events to debate why Joe Public is not saving more/investing more/being more engaged. And now we pay behavioural economists another serious amount of money to tell us what we need to do to move the dial a few notches. 

Two years on from the launch of The Financial Advice Market Review (FAMR), the establishment of a Financial Advice Working Group, progress reports, debate and discussion, a consultation period, and 48 pages later, how close does the latest ‘robo’ guidance paper from the FCA, FG17/8: Streamlined Advice and Consolidated Guidance, go to realising my dream? What does it tell us that we did not know before? How far – this time – has the dial really been moved?

Effectively, FG17/8 is the new bible for everyone interested in developing a new automated (digital /robo /telephone-based) advice solution. Or it is a checklist for those who have already trodden down this well-worn path.

Do note though – as if you did not already know – the paper “contains general guidance and is not binding”, is not “exhaustive”, must not be read in isolation of the handbook, and does not address any potential changes that might arise from the implementation of the Insurance Distribution Directive. (Heaven forbid anyone would actually take any accountability for what is between the covers).

Key points

• FCA paper FG17/8 is the new bible for everyone interested in developing a new automated advice solution.
• Streamlined advice is an umbrella term that covers both simplified and focused advice.
• Firms must have effective processes for maintaining adequate and up to date information about their clients.

Accepting the wiggle room the regulator will always demand, the paper started life with some great intentions and was developed in response to two FAMR recommendations published about 18 months ago, in March 2016:

• Streamlined advice (FAMR Recommendation 4)
• Fact find process (FAMR Recommendation 10)

It also incorporated earlier guidance found in FG15/1 Retail Investment Advice and FG12/10 Simplified Advice, concerning adviser charging, complaints and redress, professional standards, appropriateness and discretionary investment management.

So what nuggets can we find among the 48 pages? Well, I have done the reading so you do not have to (unless you have a sudden urge) and the following provides a bullet point overview…and for the avoidance of doubt, this is generalised, not exhaustive and certainly non-binding.

• Streamlined advice is an umbrella term that covers both simplified and focused advice, and might include automated, robo-advice services or more traditional face-to-face or telephone models.
• The terms ‘streamlined’, ‘simplified’ and ‘focused’ are recognised as being industry terms. Firms should consider using more client-facing labels or descriptions to make clear the service on offer. 
• Although streamlined advice may deal with more limited client needs – and therefore collect client information that is proportionate (and confirmed correct) – any personalised recommendation must be suitable, and a firm may use warnings to alert clients to the narrowed focus of the service. 
• Firms must identify their target market, understand the needs of the type(s) of client the service is aimed at, and deliver a service capable of delivering an outcome that meets their needs. This includes the scope of the service, the products to meet client needs and a triage or filter process to exit clients who are unlikely to have their needs met by the service. Firms should maintain an ongoing monitoring of who is using the service against their target market. 
• Suitability rules cover client knowledge and experience, their financial situation (including their ability to bear losses, their indebtedness, and their access to an emergency fund), and their investment objectives, including their risk tolerance. Only information necessary to provide a suitable recommendation need be collected. The suitability assessment is the firm’s responsibility, clients must not "self-assess". 
• For ongoing advice or portfolio management services, firms must have, and be able to demonstrate, effective processes for maintaining adequate and up-to-date information about their clients. Importantly, where firms hold existing information about a client this should be used to cross-check the reliability of the information obtained from the client unless it is not possible for them to do so. For example, because the existing information is held in a separate business division on systems that cannot be accessed.
• Importantly, the product governance obligations set out in the Product Intervention and Product Governance Sourcebook (Prod), effective 3 January 2018, must be considered and will likely inform the firm’s marketing strategy, the range of investments it offers, the design of the customer user interface and the controls put in place to monitor the results. 
• Some products are unlikely to be appropriate for a streamlined advice process because of the amount of information likely to be needed to make a personal recommendation (such as complex, risky, highly concentrated or illiquid products, or where the firm is advising on transfers, especially where the existing product is complex, such as a defined benefit pension). 
• Firms are required to employ people with the skills, knowledge and expertise necessary to perform their roles and meet their responsibilities, and deploy robust risk management controls to ensure staff do not stray outside what they can and cannot do. 
• Firms must provide appropriate information about their services so clients can reasonably understand (and confirm) the nature and risks of the service and the investment being offered, so decisions can be taken on an informed basis. 
• Information about a client’s investment objectives must include the length of time the investment will be held, their preferences regarding risk taking, their risk profile and the purposes of the investment. Clarity is key, particularly in a fully automated advice situation where the client might not have the ability to ask clarificatory questions of an adviser. 
• Firms should explain they are providing regulated advice and explain the differences between the scope of their streamlined advisory service and other types of service available (including in the wider market). 
• Firms should also explain whether the advice is independent or restricted and the relationship between the product provider and the adviser. 
• Third party services – acting as a client’s personal repository of information – can be used (in line with data protection rules and the client’s express permission) as the basis for the client fact find and advice, provided the firm has confirmed the accuracy of the data. 
• A new fact find may be required in certain circumstances, such as a long time elapsing since the last transaction, or where the client has experienced a major life event, such as marriage, the birth of a child, a career change, or is approaching retirement.

Move along, nothing to see here.

Two years. Two years. To pull together in one document the working practices that professional firms already follow with their eyes closed?

To sum up FG17/8: rather like the England football team, it promised much, there was plenty of hype, but ultimately it left me feeling unsatisfied and wanting more.

Simon Bussy is domain director, wealth, of Altus Consulting