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Ian McKenna: FCA must name and shame badly behaving robos

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.

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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.

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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.

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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


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Anthony Carty 5th June 2018 at 3:24 pm

    Given the closing paragraph of the article above, surely naming & shaming would be grist to the mill of CMC’s? It seems to me that the FCA’s relatively early intervention into this sector is welcome & those put on notice to improve standards will do so should they wish to remain in business without regulatory scrutiny or sanction.

  2. William Burrows 5th June 2018 at 3:28 pm

    Its not every day I agree with Ian but he is spot on here

    Well done

  3. derek bradley 5th June 2018 at 3:28 pm

    Professor Stephen Hawking issued a chilling warning about the imminent rise of artificial intelligence. During the interview, Professor Hawking warned that AI will soon reach a level where it will be a ‘new form of life that will outperform humans.’

    There is a move afoot to bring the delivery of financial advice into the 21st century. After all with the smart phone, tablet and virtual reality all breaking through boundaries, why should financial advice not find itself in the vanguard of change?

    It should work, could work, but will not work until something very simple yet clearly requiring a considerable volte-face takes place.

    So, here’s a thought for you.

    This may take a little of your time but bear with me please.

    Steve Jobs reckoned that “Older people sit down and ask, ‘What is it?’ but the boy asks, ‘What can I do with it?”.

    Smart technology exists and is readily available in the average home.

    Algorithm based analytics are there, right now, to deliver for the mass market an automated method of providing the average family with the ability to self medicate their financial ailments and prescribe a solution.

    This happens in many areas of web based life today so why not financial services?

    The elephant in the room of progress is the word ‘advice’. Because in the financial services world where products are delivered/ sold/ distributed by the intermediated channel the buck of responsibility always stops with the financially weakest part of the process, the advisory firm.

    Product failure, rather like design failure in modern airliners, is unheard of. With an airplane the crash blame is pretty much always directed at the pilot. With the advice world it’s the advisor ‘wot get’s the blame’, never the product.

    Robo or automated solutions should work, it is all in the ‘math’? Very complicated algorithms drive the customer to a very specific outcome.

    This is where it gets complicated because at the moment should the algorithm prove in five, ten or fifteen years to have had an unforeseen glitch regulatory retrospective retribution will rain down on the advisory firm, not the maker of the programme.

    There is a simple solution to a complex problem.

    That is to have the algorithms certified as fit for the purpose they were designed for.

    Fit for purpose accreditation already exists in other areas of regulation. Aircraft cannot fly in UK airspace without CAA approval. Drugs are certified as fit for purpose and prescription with the Medicines & Healthcare Products Regulatory Agency.

    So why can the FCA not approve automated advice models as fit for purpose?

    The answer according to Andrew Mansley at the FCA, who I spoke to at some length at the PFS Festival last year, is that it would be “anti competitive”.


    There are examples of this statement being used to create chaos and detriment in this industry. The Maximum Commission Agreement springs to mind. For those new to the world of financial services this is an essential read-

    For those with not enough time served in this industry, you should know that from the late eighties increased commission levels from larger distribution channels were being sought after the OFT got rid of the Maximum Commission Agreement (MCA) as it was seen to be anti-competitive.

    I suspect the real reason would be that, in the words of Hector Sants, strangely not known to Mr. Mansley, “if the regulator was to take responsibility for it’s actions, nobody would want to do the job”.

    The FCA needs to consider the following simple steps to improve the embrace of automated opportunities.

    All robo models should apply to the FCA for approval, that approval will certify what the programme can and cannot do and rather like a fully automated vehicle
    The FCA approval will apply to the algorithms and the programme
    Any changes, upgrades would require a certification upgrade
    The robo technology would require PI cover for any unforeseen failures and not the adviser firm
    The advisory firm would NOT be responsible for any advice/ guidance failure of the robo programme as part of the FCA sign off

    In October 2016 last year, Professor Stephen Hawking warned that artificial intelligence could develop a will of its own that is in conflict with that of humanity. With this in mind, the advice responsibility buck must stop with the technology provider and not the adviser

    Put these in place and both the regulator and the software house would think very carefully about failure, the adviser could engage with more consumers with confidence restored.

    We can always dream?

  4. Rory Percival 5th June 2018 at 7:35 pm

    Under s348 of FSMA it would be a criminal offence to name and shame except in particular scenarios such as following enforcement action. I

    • Just to be clear @Rory what I am suggesting is the organisations themselves come forward and say they were involved and what they have done to address the situation.

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