The FCA’s multi firm review of automated investment services may be a first shot across the bows of the robo advice community, but for corporate advisers it provides valuable clarity on regulatory expectations. Firms nominated by employers to advise on their workplace pension are in pole position when it comes to offering automated advice to scheme members.
While a few years ago the vast majority of automated advice services were launching in the direct to consumer channel, the cost of customer acquisition is prohibitive for firms looking to capture relatively modest amounts of savings. Where a firm has already been nominated by an employer, they have an audience of potential clients waiting for help.
Many of these will have more modest means than consumers who usually take traditional face- to-face advice. But, as FTRC recently Identified in our “How Technology Becomes Core to Advice” analysis, approximately 50 per cent of the UK population have between £200 and £2,000 surplus income each month over and above their fixed expenses.
The same study highlighted that around one third of DC pension members are prepared to pay something for financial advice. Add to this the annual £500 tax free financial advice allowance and you start to have a viable model for digital financial advice for company employees.
Many of the issues raised by the FCA in the multi firm study are the same as those that were raised with the IFA community around advice suitability and risk profiling in 2011. Over subsequent years the FCA guided IFAs to far higher standards in this area before calling out wealth managers over similar failings in 2015. In some respects, the FCA is just communicating the same message to a new constituency, although they have added further points around disclosure, particularly in the context of MiFID and PRIPPS which are more recent developments. In workplace pensions however, these are less of an issue as MiFID and PRIPPS do not usually apply to pensions products.
In providing this paper the FCA is making it clear what it expects of automated advice services. For everyone entering the market this should be seen as helpful. It does mean that workplace firms will need to decide if they want to provide automated “advice” to individual scheme members or limit their services to guidance. In the latter case they will need to be careful that they do not inadvertently cross over into advice.
Looking at the wide range of robo advice propositions examined at FTRC’s DigitalWealthInsights.com site, it is clear many robos are positioning themselves as non- advised, whereas if you review their processes they are clearly going through many of the steps, highlighted in the FCA study, that are seen as part of an advice process. Reading the FCA paper I get the definite impression that the regulator is targeting these firms. It looks like they are saying if something looks like advice and smells like advice, from a regulatory perspective it almost certainly is advice, and you can’t make it not advice simply by saying the service is “non-advised“.
One significant area called out by the FCA is the failure of firms to address individuals’ capacity for loss. This again echoes previous advice on suitability. Cash flow planning has increasingly been seen as a valuable tool through which to address such issues and the development of Open Banking services can make this far easier to construct.
This will need member consent. However, the adviser nominated by the employer providing the member with a personal financial plan should be part of a process for which, if approached directly, the individual would be willing to grant consent. This consent will be easier to obtain if the proposition is part of an employee benefit paid for by the employer from their tax-relieved financial advice allowance. The work already done by practice management software providers like Intelliflo and True Potential and stand-alone PFM services such as Moneyinfo and new kid on the block, Emma, (see emma-app.com), could be very valuable here.
The FCA is nudging different constituencies, sector by sector – IFAs, wealth managers and now robos – into line on suitability. Corporate advice firms could be next, so it’s probably wise to review current processes even if you’re not offering digital advice.