Robo wars: a fight for the future of auto advice?

Auto advice – which emerged several years ago under the moniker of “robo advice” – might seem passé in the context of an ever-changing fintech landscape. But as new entrants bring further innovation to market, and the relationship between auto advice and the UK regulators appears to cool, now is the time to look at how such technologies can thrive amid a backdrop of closer regulatory scrutiny.

Closing the gap

HM Treasury and FCA’s 2016 Financial Advice and Markets Review highlighted a growing “advice gap”, citing Citizens Advice research that indicated up to 5.4m extra people would consider paying for advice if it cost less. Separately, the FCA has even indicated that its Retail Distribution Review contributed to the gap, with more retail investment products now sold without advice.

While the government has delivered limited changes, such as the £500 “pensions advice allowance” to support the pension freedoms, it
is no surprise that the FCA has been particularly receptive to auto advice as a scalable way to deliver mass-market, cost-effective advice. As well as setting up a dedicated Advice Unit to support its development, the FAMR established four success outcomes, all of which – in one stroke – auto advice would help demonstrate had been achieved.

FAMR success outcomes at-a-glance 
Good availability of affordable, high quality advice and guidance
Greater innovation in the interests of consumers
A range of channels through which consumers can access advice and guidance
Consumers engaged with their own financial affairs
 
Regulating the robots

Obligations on firms offering financial advice – including MiFID II and money laundering regulations – are broadly agnostic to the method of delivery. Auto advice providers have been able to emerge within this framework and make personal recommendations for simple consumer needs based on the “streamlined advice” model set out in FCA guidance FG17/8.

However, in May 2018, the FCA announced its findings of a discrete review into how firms are meeting the standards for auto advice. The review found that some auto advice services “lacked fact-finding and [KYC] focus”, particularly regarding information on the user’s financial position.

The FCA also saw instances of clients being able to disregard the auto advice recommendation without any safeguards or risk warnings in place. This caused uncertainty whether an advised, execution-only or insistent client transaction had taken place. Elsewhere, firms had difficulty identifying vulnerable customers and were criticised by the FCA for not considering advice-specific risks in their governance processes.

Auto advice solutions will become more sophisticated and nuanced, and there are even signs that the industry could incorporate human-plus-auto hybrid delivery models. Following the review’s findings, providers will need to take extra care in demonstrating that proposed auto advice solutions have all the regulatory bases covered.

Five robo advice recommendations

So, what can providers do to develop auto advice solutions that are not only regulatory watertight but also able to thrive in what remains an exciting and burgeoning market? Here are five recommendations for firms:

  1. FCA Guidance: Make use of the FCA’s guidance on streamlined advice which, while not binding, is expected to be followed by developers
  2. FCA Advice Unit: Apply to the FCA’s dedicated Advice Unit which provides individual feedback to firms (subject to eligibility) on auto advice solutions across myriad financial services products
  3. Governance processes: Ensure that risks specific to auto advice are clearly identified in governance processes, particularly within larger firms where this may be a small part of the overall proposition
  4. Keep up to date: Remember that a firm’s obligations do not stand still. An auto advice solution can take months to develop, during which time the regulations it is subject to may change. For example, enhancements to rules on how future performance is presented in communications, as well as the obligations under the PRIIPs Regulation, may have impacted recent development of auto advice solutions
  5. Legal advice: Firms should seek legal advice where necessary to ensure that its auto advice solution is compliant with all the necessary regulations at launch and is future-proofed (as far as possible) against known changes in the future

Written by James Piggott, Trainee Solicitor, Financial Regulation Group