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Has the FCA forgotten about the advice gap?

Robos came under fire this week, with an FCA review finding serious failings in terms of suitability and disclosure. Adviser comments soon followed, praising the regulator for finally getting tough on automated advice.

Here are a few extracts from the FCA:

  • Some firms did not make clear whether their service was advised, non-advised, discretionary or non-discretionary.
  • Many firms offering online discretionary investment management services did not properly evaluate a client’s knowledge and experience, investment objectives and capacity for loss in their suitability assessments.
  • Firms should consider how to improve the amount and quality of client information collected during the auto advice process.
  • Firms need to make sure client information is not materially out of date, inaccurate or incomplete when undertaking a decision to trade.
  • Firms should consider how their processes and record-keeping might be improved to limit potential harm to customers.

Nowhere on the FCA web page or in the trade press articles and adviser comments that followed does the term “advice gap” appear. Nor is there any mention of the UK savings gap estimated at over £300bn by the International Longevity Centre.

FCA robo review a wake-up call for the industry

These are the real problems robo advice should be targeting but nobody seems to be measuring progress against these challenges. Instead, the FCA is busy subjecting robos to the same scrutiny it applies to face-to-face advice firms.

Some advisers see this as entirely appropriate and I am sure they, along with the FCA, would argue the regulator has no choice but to implement the rules as written.

The thing is, those rules need to be re-written to reflect a new reality in the wake of RDR. There are up to 10 million UK consumers who are no longer able or prepared to pay the cost of traditional advice services but who urgently need to save if they are to have any prospect of a decent retirement. These are the people robo advice needs to help.

They do not care about legal definitions. They do not know about investing. They do not want to spend hours doing psychology tests. And the far greater harm they face is not investing rather than choosing the wrong investment.

What they need is a better return than cash for a little bit more risk via mainstream assets and at a lower cost than traditional channels. All of this is entirely feasible and could be offered seamlessly to the mass market by high street banks based on data they already know about their clients without requiring lengthy fact-finding or risk questionnaires.

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The only problem is, that would require a serious shake-up of the regulatory rulebook. Rules that make it possible to rely on data an organisation already has about its clients – the way Amazon does. Rules that allow the regulator to assess and kitemark low risk products – the way the New Car Assessment Programme works. Rules that enable a robo advice firm to have its algorithms audited and approved – the way the International Standards Association works.

Instead, we got the Financial Advice Market Review from a regulator that seems systemically incapable of seeing the bigger picture.

Kevin Okell is founding director of Altus Consulting



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There are 22 comments at the moment, we would love to hear your opinion too.

  1. derek bradley 24th May 2018 at 1:20 pm

    Singing from the same songsheet.

    In November 2017, Professor Stephen Hawking issued a chilling warning about the imminent rise of artificial intelligence. During the new 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 lovers of Steve Jobs and even Ned Ludd.

    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.

    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, is that it would be “anti competitive”.


    There are examples of this very same if not exact 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, not known to Mr. Mansley it would seem, “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 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 stops 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?

  2. What the FSA forgot when implementing RDR was that all those lovely clients who have good pensions and investments IFAs deal with now were those very people who bought commission based products many years ago when they were young and had little money to pay for separate fees for advice.

    The RDR rules have disengaged the younger generation who don’t save. Remove the distribution costs (commissions) and hey presto you remove the distribution. SIMPLES!

  3. Whether the advice gap exists or not is up for debate ?
    Advice channels are out there for the consumer, however there are some major stumbling blocks one has to traverse to get to it or them !
    As for the FCA, i think they are more than happy for these to stay in place, therefor an mention of advice gap any gap even the Watford gap whistles past their ears.
    The advice gap is (if you will) Shrodingers Cat its neither alive or dead until you actually open the box to see …

  4. Richard Taylor 24th May 2018 at 1:53 pm

    Harry Katz posted this in relation to another article, but I think it is highly relevant here:
    “UK working population is about 26 million add about 10 million retirees. 90% are either in deep debt or have no facility to save. This leaves about 3.5 to 4 million who take advice. I guess that’s plenty for the financial advice community.”

    • Christopher Petrie 24th May 2018 at 4:52 pm

      7 million folk have recently started saving into pensions through Workplace pensions. That seems to blow those numbers right out the water.

    • Thank you Richard

      As I have so constantly tried to point out – there isn’t really an advice gap at all. There are those who can afford to and wish to engage and there are those without the wherewithal and those that don’t wish to engage.

      Nic’s recent piece about ignorance also applies here.

      I suspect that those who constantly harp about the ‘advice gap’ have in mind the old the old situation, where the less well off were flogged useless products which had an abysmal consistency and were encashed within short order often resulting in a loss.

  5. I have been lifting the lid on a lot of big data analytics and also on the levels of AI that is regarded as AI at the moment, and I don’t particularly want to demoralise those optimists trying to make progress, but truly, it isn’t very good. I could have written some of the decison tree stuff with Bayesian feedbacks that passes for “clever” systems when I was six years old, using a Sinclair ZX Spectrum.

    Most big data analytics people are barking entirely up the wrong trees too. They are using it for “balance of probability” work, in the same way traditional insurance underwriters have always done (eg young driver – more likely to have an accident) and it sort of makes sense. When you start applying trends, and tendencies from big samples to small subjects (eg one person), the whole thing completely unravels. Actuarially an 85 year old is 57% dead, and yet, well they are either 100% or 0% dead in the real world.

    To the unitiated (and I hate to condemn more than 99% of people to this category) who don’t have the numerical, logical and computer systems skills to appreciate what is and isn’t going on in so called AI systems at the moment, it all looks and sounds like magic. The FCA are right to be sceptical. When you listen to the BBC, a repository for dreamers with little scientific training if ever there was one, you’d get the impression that driverless cars were just round the corner. Actually they are decades away, if even that soon, and anyone working on the project will tell you that they are really only at the “driver assistance” stage at best. And this is where robo advice systems are too. Sorry, but telling the poor, that they are too poor for proper advice so they should talk to a dalek is not going to be the solution anytime soon.

    • The real issue is that most firms of advisers just aren’t interested in providing a low cost, digital service for customers with modest assets.

    • According to quantum theory the 85 year old is in every state of aliveness until you collapse the wave function through observation.

      • Love it. I once tried to invoke Heisenberg’s theory when nabbed by a police speed trap. “How can you possibly know I was even here, if you know how fast I was going?” didn’t cut any mustard with Her Majesty’s Plod as evidenced by £60 and 3 points.

  6. Julian Stevens 24th May 2018 at 3:54 pm

    The primary cause of the advice gap is over-regulation and a lack of will and clear thinking as to how best to cut through it all.

    The standards required document suitability in a fully compliant manner are endlessly ratcheted up and up and up. Nothing is ever wound back or relaxed.

    Regulation is neither targeted or proportionate. The FCA tries to do it by way of the lowest common denominator for all, as if we’re all spivs and cowboys but, as David Own once said If you try to prioritise everything you end up prioritising nothing. How very true.

    The FCA is staffed by people like Linda Woodhall, whose bunker mentality mantra was that on her watch there’d be no loosening of regulation. This demonstrated a fundamental refusal to take on board the notion that in some areas regulation needs tightening up, whilst in others it does need loosening.

    How, in such an environment, can the provision of advice ever be affordable and accessible for all?

  7. Duncan Gafney 24th May 2018 at 3:55 pm

    The thing I find most ironic, is that it is the FCA themselves and the “people can never be responsible for their own actions” mentality that has created the “advice gap” in the first place.

    Fundamentally these days, very few advisers exist where there is an intention to put themselves first, or where their knowledge is so woeful than the client is in real danger of getting poor advice.

    Certainly when it comes to things like saving in an ISA or pension, even a bond or GIA, fundamentally there are only two real dangers.

    1.) That the client is not made aware of the risks and or the risks are not suitable to them.

    2.) That an adviser is “churning” products for no real reason.

    Beyond these things, charges have to be declared and in many cases are capped, risk warnings have to be provided in product literature and a client who is saving/investing, is going to be better off than one who is not.

    Yet even to save £100pm into an ISA or pension, they have to go through a huge process, where the risk of client detriment is virtually nil.

    Compare this to how easy it is to borrow money, where there is real risk of the clients ending up in the do do and you can borrow money in about 20 mins..

    However we now have the situation where the regulator is for the most part simply to try justifying it’s own existence and the jobs of those it employs.

    Can anyone name any significant contribution the regulator has made in the last few years to reducing a clients chances of getting ripped off?

    We also see time and again, FOS adjudications, where honestly the client either didn’t bother to read what they were given, or were willfully stupid.

    Should all clients have to pay £bn’s a year in regulatory and compliance costs, to protect a few people from their own stupidity?

    Far better to dramatically slim down the regulator, certify certain types of products in certain circumstances e.g regular premium ISA’s, pensions etc as minimal risk products only needing a very simplified suitability assessment, which could be delivered by a robo adviser or even a human being for a couple of hundred £’s. And watch significant numbers more people start saving and investing.

    Then have the regulator far more focused on actually overseeing firms, looking for systemic issues within the actual companies, looking for the bad eggs and stop the navel gazing that seems to go on Canary Wharf.

    Heck maybe even have the regulator actually be specific about what an adviser has to cover in FF’s and SR’s, have them be specific about standards, rather than dishing out standards that don’t actually say anything specific.

  8. What was that saying? ‘Those that can do and those that can’t teach!’ I think it goes something like that!….. spot on for our industry!

  9. Kevin – regardless of the advice gap, “robo” advice or “face to face” advice should be regulated the same way. There has to be a level playing field, and not leniency on the rules (thereby promoting unsuitable advice and outcomes) for “robo” advice.

    Ask yourself this question, if a Robo advice firm gives unsuitable advice and goes bust, who pays the FSCS fees? That’s right… all advice firms plus product providers etc. So they must be looked under the regulatory scrutiny.

    To address the advice gap, the FCA should long have ring fenced certain low risk, mainstream products with a de minimis rule so there are lower regulatory burdens and hurdles to jump over (and no risks of future complaints to FOS). E.g. £100 regular savings into a S&S ISA should come under this. This would then lower the costs to servicing entry clients/lower end of the market. The over regulation is what’s causing the advice gap.

  10. There is no advice gap.

    People that want to pay for and value advice, do.

    Those that don’t, wont.

    • That’s a bit glib. Being priced out of the market doesn’t mean someone doesn’t want or value advice.

      Whilst those that don’t won’t, neither will those that do, but can’t.

      • Yes it’s glib. But experience leads one to ask:

        Do you have Sky TV
        Do you smoke
        How often do you go to the pub
        Do you belong to a gym
        How many Starbucks do you buy each week.

        Logic dictates that if they require financial advice then they must have assets or income considerations. If so affordability boils down to a matter of choice.

  11. More like a common sense gap – regulatory and consumer driven

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