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Ian McKenna: FOS holds UK back from being a world leader in innovation

The Financial Advice Market Review has clearly identified that both the Government and the FCA see technology as having a huge role to play in making advice more affordable and accessible. Increasing numbers of adviser firms are recognising this and moving to embrace some form of automated service as part of their offering.

The recently published review of progress in implementing FAMR recommendations shows a positive picture overall. However, there continues to be one area where progress in terms of technology and innovation significantly lags behind the rest of the market: the Financial Ombudsman Service.

To give credit where it is due, the recommendations from the review have been implemented. The FOS has been holding best practice roundtables around the country, both individually and with the FCA. It has also been publishing more data about uphold rates and examples of decisions it has taken.

The difficulty is that FAMR was not bold enough in its prescription for the FOS. The recommendations were 20th century solutions to a 21st century problem.

The speed of innovation in the digital age is such that the traditional regulatory approaches of publishing rules and subsequent policing of them is no longer fit for purpose. Regulatory structures need to be proactive and seek to understand and engage with the emerging digital economy.

The FCA has been rightly lauded for its proactive approach with Project Innovate, the Advice Unit and the regulatory sandbox. These initiatives are frequently identified as key reasons why the UK remains a great place for innovators to build new businesses.

But all of this could be undone if the Ombudsman cannot also evolve. Where are the parallel initiatives from Exchange Tower?

I often hear the inconsistency of traditional advice actually highlighted as a benefit over digital because there is less risk from the Ombudsman. Some firms accept their human advisers will fail to meet regulatory requirements a certain percentage of the time and can provide for that in their reserves.

A digital solution delivering consistent results is seen as a greater risk. If the Ombudsman works to find fault with one case this could potentially create a compensation liability for everything that has been produced. Ironically, consistency here is seen as a systemic risk.

If parts of that argument seem a little absurd, that is because they are. However, the absurdity does not dilute the risk to our financial technology economy.

Even post-Brexit, we will be ideally placed to be the world leader in automated advice based on our rigourous suitability regime and the positive aforementioned steps being taken by the FCA.

This has huge potential to create a vibrant sector that will benefit UK consumers and work as a global export. So serious reform of the FOS is now in the national interest. An Ombudsman that can only look backwards is no longer fit for purpose.

The FCA’s business plan published last month is a very different document to the equivalent publication from the Ombudsman.

In a 15-page section on risk outlook in the FCA’s document, no fewer than eight pages reference technology and its impact. I cannot find a single mention of the subject in the FOS’ business plan, which speaks volumes about its approach.

I have long believed that, due to its failure to adopt a more supportive and collaborative operational approach, the FOS is the biggest barrier to consumers getting the advice and guidance they need at a price they can afford. It is certainly the largest single factor in constraining automated advice solutions.

In a world where we will soon need export opportunities more than ever, the Ombudsman must start to deliver the level of cooperation now seen regularly from the Treasury and the FCA. It should recognise the need for change and embrace it by following the FCA’s great examples.

Ian McKenna is director of the Finance & Technology Research Centre

He will be joining us at Money Marketing Interactive as a speaker on May 18th.


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. Ian, this is all largely true but I don’t think you have got down to the nub of the problem.

    The problem is the advice and suitability rules as they are currently drafted, along with the prodigious amount of guidance accompanying it. They simply don’t work for automated advice. The FCA play at innovation but the buck will always stop with the rules. Current innovation is simply playing around the edges. We know those edges are complex and problematic. An attempt at defining what advice means in FG15/1 took 40 pages with most firms agreeing it didn’t help much. Suitability rules imply a level of engagement with clients which can only realistically be achieved through human interaction with no account taken for simple client situations – the rules effectively demand a Rolls Royce service for all.

    And here’s the rub for regulators. Any dilution of rules around advice or suitability to reasonably accommodate automated processes must also apply to face to face ones. That probably feels like a step too far for the FCA and introducing a two-tier system wouldn’t be fair or acceptable either (though there are some hints this is happening by stealth now). The FOS simply follow the rules because they have no choice, I think they are a symptom, not the problem.

    So where does that leave things? Tinkering. Pretending to make progress. The wheels have come off the car and the solution from on high is to get lots of people to push it and celebrate the forward progress. Just don’t mention fixing the wheels. Whatever next!

  2. Spot on Ian. It is not just new forms of distribution It is also more traditional methods are compromised too. In particular in-coming investment; there is huge interest by investors/PEs/VCTs in the sector but they run away because of the threat of FOS retrospectively creating standards.

  3. Think we have to recognise that customers can choose the level of support they want to suit their budget and as long as the limitations are explained and understood why shouldn’t they- I want a Bugatti Veron- but have to setlle for Fiat Abrath for budgetary reasons- I know it won’t go as fast as a Bugatti- consumers are not stupid, they will know the difference and as none of it is an exact science- nor should it be- what is the issue- we are leagues away from levels of incompetence from the 80s- we need to put consumer first and work out how best to help them. It would help if there wasn’t so many people trying to get round rules for wrong reasons still.

  4. I’ve been pointing out this point to Ian for years, I’m pleased he has at last taken on board why traditional advice still trumps digital alternatives so much in the UK.

    I note his “even post-Brexit” comment…Ian reveals his Remainer tendencies! In fact, post-Brexit, the U.K. Will have the powers again to decide its own financial advice laws in full. Whether the government will allow the risk of mis-selling on a digital industrialised scale remains to be seen. Given Lloyds and Royal Bank of Scotland are AGAIN under fire, this time for structured product mis-selling, I can see why the FOS may not be reformed as Ian would like.

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