A probe into seven firms offering automated online discretionary investment management (ODIM) found a lack of clarity in service and fee-related disclosures at most firms. Some firms did not make clear whether their service was advised, non-advised, discretionary or non-discretionary. Some firms also compared their fee levels against peer services in a potentially misleading way. One provider 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 investigation found several firms offering ODIM services did not properly evaluate a client’s knowledge and experience, investment objectives and capacity for loss in their suitability assessments. Some firms did not ask clients about their knowledge and experience at all, as they felt their service was suitable for all individuals regardless of their investment knowledge and experience, potentially in breach of COBS 9.2.1R and COBS 9.2.2R, which require a firm to gain sufficient information about a client’s relevant knowledge and experience, financial situation and investment objectives to make a recommendation or take a decision which is suitable for the client.
Most firms in the ODIM services sample were unable to show that they had adequate and up to date information about their clients when providing an ongoing service.
At the time of the review these seven firms represented over half of the firms in this market.
A second review examining three firms providing retail investment advice exclusively through automated channels, which the FCA describes as ‘auto advice’, found them to be making assumptions about client knowledge, suitability and investment objectives. Auto advice, where customers do not interact with human financial advisers, is given on a one-off basis when the customer first engages with the firm. The FCA says it plan to review further firms in this market later in this financial year.
The review found that some firms offering auto advice services via a ‘streamlined advice’ model to make a personal recommendation lacked adequate fact finding and ‘know your client’ focus, instead relying on assumptions about clients. The FCA said it was not satisfied with the strength of information gathering about clients’ financial circumstances. Some services failed to request or gather adequate information about customers’ debt and other outgoings.
In some cases, auto advice services recommended a different transaction to the one that took place at the end of the advice process. The regulator saw examples where clients could disregard advice given by the automated offering without any safeguards or risk warnings to prevent or challenge this. This created uncertainty about whether the business was transacted on the advice of the automated offering, or on an execution-only or insistent client basis. Sometimes an adviser intervened in the automated process without recording the nature of the intervention. In these instances it would be difficult for firms to show the suitability of the advice provided, says the FCA.
In firms providing auto advice services there were weaknesses in identifying and supporting vulnerable consumers, with some offerings relying on the client to self-identify as vulnerable, says the FCA.
It also said that there appeared to be little consideration of auto advice-specific risks in firms’ governance processes, including a lack of awareness of the need for adequate stress testing and cyber security.
The review also found confusion within some firms as to the nature of the auto advice service being provided. While some networks were able to show clear oversight of the auto advice proposition, other networks lacked clarity over how responsibilities were shared between the adviser and the network.
Old Mutual Wealth head of retirement policy Jon Greer says: “ Since pension freedoms, and the subsequent surge in defined benefit pension transfers, access to high quality financial advice is more important than ever. The Work and Pensions Committee recently called for a comparison of face-to-face with robo advice to better understand how automated investment and advice services to help fill the general advice gap.
“The FCA’s review into automated advice has noted some problems with these models, for instance how they can identify vulnerable customers. As these growing pains are worked through we are likely to see more hybrid models which combine the strengths of face-to-face advice with those of an automated process.
“The journey to 24/7 financial advice provided by robots has not been as swift as anticipated and this review offers an opportunity for reflection on how technology best fits within the financial advice industry. Findings from the regulator’s further investigations will be hotly anticipated.”
LEBC director of public policy Kay Ingram says: “Robo advice with no human intervention is unlikely to be suitable for those who need to make strategic financial decisions – how best, for example, to prioritise competing demands on their time and money. At the same time, we must recognise that face to face is today beyond the financial reaches of many individuals.
“We believe the balance lies in bionic advice, which combines technological efficiencies with human empathy. Through bionic advice we are making quality advice accessible to greater numbers of people at a more affordable cost, retaining at the same time the important sense checking which only emotional intelligence can provide.”