“The scope for a major misselling scandal is very real.” That is how a lawyer friend of mine described the results of the FCA’s review into robo-advice last week. I’m finding it hard to disagree with that verdict as it stands.
It’s difficult to know where to start, as the list of deficiencies is pretty wide ranging. Suitability assessments failed to properly evaluate objectives and capacity for loss. Most firms couldn’t provide enough up-to-date information to adequately maintain an ongoing client relationship, there were flaws in spotting vulnerable customers, and oversight of firm-level risks was weak.
My key takeaway, however, was that “there appeared to be confusion within some firms as to the nature of the auto advice service being provided”. Essentially, “robo-advisers” were caught out for not making it clear whether their service was actually advised, or non-advised, discretionary or non-discretionary.
Whether someone is giving advice, guidance or anything in between has real implications for issues such as consumer protection, so should not be passed over glibly. It’s not as if robo-advisers were not warned, either. A linchpin of the Financial Advice Market Review in 2016 was to clarify the precise boundary between information and fully regulated advice, a mission accomplished by adopting the Mifid II standard that advice must contain a personalised recommendation.
Being called out for communications that look like advice, smell like advice but don’t actually provide it should scare the robos into action. It never was good enough to sit on the fence, pretending that the nudges and hints you gave were worthy of the term “advice”, but not actually giving it from a regulatory perspective so as not to take on the additional liability.
Banks have been quite smart when it comes to this exact problem. After culling adviser numbers post-RDR they were quick to adopt DIY savings and investment services for retail clients. Then they started making noise about developing bolt-ons or hybrid models that would provide actual advice. Many of these have stalled or been ditched altogether, presumably for fear of regulatory reprisal should the FCA (rightly) decide that advice was given. I would hazard a guess that many independent robo-advisers will soon follow suit.
It is interesting to note that the FCA says the seven automated online discretionary investment management firms it reviewed made up over half of the firms in that market at the time. With new entrants moving in since, this will have only exacerbated the FCA’s concerns.
If robo-advisers want to keep calling themselves that, then fine. But they must bear the consequences of the advice label.