The FCA says firms have been deterred from developing simplified advice models over fears that automated advice could lead to “systemic misselling”.
The regulator has laid bare the industry’s uncertainty over how to develop compliant simplified advice models, which the regulator says is stopping new models coming to the market.
The FCA has published its findings following its thematic review into simplified advice and non-advised sales, alongside guidance on developing new advice models.
It says there is uncertainty among firms and trade bodies about suitability standards for online advice.
The FCA says: “Firms are concerned that automated advice processes providing personal recommendations could result in systemic misselling if parts of the process produce unintended, unsuitable recommendations for certain groups of customers.
“This led many firms to include significant compliance and misselling liability costs within their business plans, limiting their commercial liability.”
Firms also raised concerns with the regulator about whether they would be held responsible for advice they have given that is then carried out an execution-only basis with another firm. Firms said pricing in this “risk premium” makes developing simplified advice models less commercially viable.
The industry also told the FCA that, notwithstanding the above issues, it was still unclear how the Financial Ombudsman Service would handle simplified advice cases. As FOS decision notices are now publicly available firms believe this could result in “significant, focused activities” by claims firms.
In the firms the regulator visited which offer simplified advice, the FCA says uncertainty around the rules meant there was increased levels of pre and post-sale compliance oversight. There were also worries about whether unsuitable customers were being excluded from the process effectively enough, and doubts about the online risk profiling process.
The FCA says: “These findings have been used to inform the guidance consultation we have published clarifying the regulatory boundaries between retail investment services involving a personal recommendation and those that do not, as well as identifying and exploring how we might tackle any regulatory barriers that prevent firms from designing simplified advice models.”