Robo-advice  

FCA finds robo-advice suitability failings

FCA finds robo-advice suitability failings

The Financial Conduct Authority found failings around disclosure and suitability during its review of robo-advice which required many of the companies which took part in the process to make "significant changes".

As part of the review the regulator looked at seven firms offering automated online discretionary investment management (ODIM) and three firms providing retail investment advice exclusively through automated channels.

Among the FCA's concerns was the fact service and fee-related disclosures at most automated fund management firms were unclear.

Some firms in the review did not make clear whether their service was advised, non-advised, discretionary or non-discretionary.

The FCA found some firms compared their fee levels against peer services in a potentially misleading way.

For example, they compared a non-advised, non-discretionary service with a discretionary service solely on a cost basis without explaining the difference in the nature of the service.

The FCA also found problems with the way these companies conducted suitability assessments, with many firms failing to evaluate a client's knowledge or experience, investment objectives and capacity for loss.

Some firms did not ask clients about their knowledge and experience at all and told the FCA they felt their service was suitable for all individuals regardless of their investment knowledge and experience.

In an update on the review, the FCA said: "The market for both ODIM and auto advice services remains at an early stage, with a number of firms expected to launch services over the coming year. We continue to encourage innovation in automated investment services.

"While this is an evolving market, our rules on suitability of advice apply regardless of the medium through which the service is offered. Assessment of suitability is the firm’s responsibility and our rules and principles apply equally to emerging automated offerings."

The FCA also found failings in the ongoing client relationship, with most firms providing automated fund management services unable to show they had adequate and up-to-date information about their clients when providing an ongoing service.

In relation to firms providing automated advice services, the FCA found there were weaknesses in identifying and supporting vulnerable consumers, with some firms relying on the client to self-identify as vulnerable.

Among automated advice firms, there was also "little consideration" given to governance processes, with a "mixed" awareness of the need for stress-testing and cyber security.

The FCA added: "We are committed to carrying out ongoing assessments of developing markets such as ODIM and auto advice. We expect existing firms and new entrants into the market to consider the issues in this article and take action where needed.

"Future reviews will include an assessment of how firms are complying with new requirements introduced by Mifid II and whether the cumulative impact of these important regulatory changes are working as intended."

damian.fantato@ft.com