“The scope for a major misselling scandal is very real.” That is how a
lawyer friend of mine described the results of the FCA’s review into
robo-advice last week. I’m finding it hard to disagree with that verdict as it
stands.
It’s difficult to know where to start, as the list of deficiencies is
pretty wide ranging. Suitability assessments failed to properly evaluate
objectives and capacity for loss. Most firms couldn’t provide enough up-to-date
information to adequately maintain an ongoing client relationship, there were
flaws in spotting vulnerable customers, and oversight of firm-level risks was
weak.
My key takeaway, however, was that “there appeared to be confusion
within some firms as to the nature of the auto advice service being provided”.
Essentially, “robo-advisers” were caught out for not making it clear whether
their service was actually advised, or non-advised, discretionary or
non-discretionary.
Whether someone is giving advice, guidance or anything in between has
real implications for issues such as consumer protection, so should not be
passed over glibly. It’s not as if robo-advisers were not warned, either. A
linchpin of the Financial Advice Market Review in 2016 was to clarify the
precise boundary between information and fully regulated advice, a mission
accomplished by adopting the Mifid II standard that advice must contain a
personalised recommendation.
Being called out for communications that look like advice, smell like
advice but don’t actually provide it should scare the robos into action. It
never was good enough to sit on the fence, pretending that the nudges and hints
you gave were worthy of the term “advice”, but not actually giving it from a
regulatory perspective so as not to take on the additional liability.
Banks have been quite smart when it comes to this exact problem. After
culling adviser numbers post-RDR they were quick to adopt DIY savings and
investment services for retail clients. Then they started making noise about
developing bolt-ons or hybrid models that would provide actual advice. Many of
these have stalled or been ditched altogether, presumably for fear of
regulatory reprisal should the FCA (rightly) decide that advice was given. I
would hazard a guess that many independent robo-advisers will soon follow suit.
It is interesting to note that the FCA says the seven automated online
discretionary investment management firms it reviewed made up over half of the
firms in that market at the time. With new entrants moving in since, this will
have only exacerbated the FCA’s concerns.
If robo-advisers want to keep calling themselves that, then fine. But
they must bear the consequences of the advice label.
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