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Freshfields Risk & Compliance

| 1 minute read

Review exposes FCA’s dilemma with auto-advice, but regulator makes expectations clear

‘Auto-advice’ (aka ‘robo-advice’) is investment advice and services provided through automated, electronic channels with little or no direct human input from the service provider. This presents a challenge: the FCA wants to encourage innovation and diversity, but new products and providers must also meet its standards.

The FCA has reviewed practices at 7 firms offering automated online discretionary investment management (‘ODIM’ – generally offered to more wealthy individuals), and 3 firms offering retail advice exclusively through automated channels (‘retail auto-advisers’).

Concerns which are already familiar in the wealth management space included disclosure and suitability: some ODIMs did not make clear whether they offered advised/ non-advised or discretionary/ non-discretionary services, or made price comparisons between those different offerings without making clear that apples were not being compared to apples; some ODIMs failed to properly evaluate clients’ understanding, objectives and loss tolerance; and some retail auto-advisers allowed clients to disregard advice without safeguards or risk warnings.

Some retail auto-advisers’ process for identifying vulnerable customers relied on customers identifying themselves as vulnerable. Also, while ODIMs generally have ‘customer journey tools’ to filter out inappropriate customers, the FCA emphasises that they need controls to ensure that these tools work.

Moving from the shop floor to management, the FCA thinks insufficient consideration is given in firms’ governance processes to risks which are specific to automated advice.

The FCA appears committed to fostering diversity of products and competition, but it has also made clear that it expects auto-advice to meet the same regulatory standards as traditional discretionary or advisory services. Firms offering auto-advice can now expect Supervisors to focus on risks specific to that business model, and to ask about who has responsibility for it and how they are exercising it. The regulator is continuing to monitor auto-advice products and firms and has made clear that, if the warning it has given is not heeded, sharper tools – early intervention and enforcement – will be used.