The automated advice sector is at risk if the regulator does not make an example of those it has found to fall short of its rules
The FCA’s recent review of automated investment services represents the end of the honeymoon period for the regulator and robos, with findings highlighting problems around suitability, fee disclosure and identifying vulnerable clients.
So, what will the impact be on those called to account, and the automated advice sector overall?
The intervention is welcome and timely but it will be important to have clarity around those involved and the remedial action taken. Without this, the review could damage public confidence and undermine the entire sector.
The UK is recognised around the world as having very high regulatory standards. I often hear it said internationally that if you can meet the UK standard for financial advice regulation, you can expect to be fit for purpose anywhere.
The FCA has been a global leader in providing positive regulatory support to this important new part of the investment landscape, in particular; one which has huge potential to help make low-cost savings services available to millions. In doing so, it has positioned the UK as an excellent place for automated advice providers to establish and evolve.
There is clear evidence this is already having a positive effect on the UK economy, attracting external investment and talent, and reinforcing the country’s lead in financial technology, despite the doubt caused by Brexit.
To avoid reversing this, more information will be needed from the regulator than they might normally provide. This would help the firms involved, as well as the wider sector.
There are parallels with some of the issues raised and action taken by the FCA over risk profiling in the guidance consultation on assessing suitability back in 2011. Over a period of years, the regulator’s guidance steered the advice community to a position where the latest study identified 94 per cent of cases suitable.
The FCA has always been clear it expects all firms – analogue or digital – to work to the same high regulatory standards, so this latest intervention was inevitable. Provided it is handled in the right way, it can only be a good thing.
That said, one element of the timing does raise concerns. The ambulance chasers are busily scouring the market for their next targets, as the PPI gravy train finally dries up next year.
If there is not clarity over which firms caused the FCA concerns, and what action will be taken, we could see the whole sector subjected to a barrage of wasteful and time-consuming complaints.
I called out similar concerns to those now raised by the regulator in Money Marketing over two years ago, when I reviewed an FCA-authorised “digital wealth manager” and found it seriously lacking in many areas traditional advice firms would be expected to excel in.
From the recent FCA statement, it appears its work was conducted some time ago. It says, at that time, the seven firms involved represented over half the firms in the market. The sector has grown a lot in the last couple of years and those authorised recently suggest the process is long and involves significant challenges.
The FCA provided feedback letters to the firms involved. Ideally, these firms will now reveal themselves, explain what action they have taken and identify any customers who may have been impacted. The FCA will have monitored what the firms have done, so it may as well take the credit for their action.
Without such disclosures, there is a risk this burgeoning sector will be unfairly tarred with the same brush.
As it is, the UK automated advice sector is building well and, for the most part, applying good standards to new ways of helping consumers. The FCA is right to call out the fact not all firms have applied its standards to the same high level and that it has taken action as a result.
In the same way the FCA guided the traditional advice community towards higher suitability standards, it should be able to steer the automated advice community without drama. No one, other than the ambulance chasers, will benefit from another scandal that would only further undermine consumer confidence.
Ian McKenna is director at Finance & Technology Research Centre