It is important the industry finds ways to make investing easier but we must remember rules have evolved for good reason
The debate over the regulatory standards for robo-advisers continues to intensify. The FCA’s recent review into automated advice services made it clear online discretionary investment managers must meet the same suitability standards as advisers. However, there is growing pressure on the regulator from some quarters to reconsider this, with arguments being made as to why such firms should be able to work to
a lower standard.
As some commentators have pointed out, the processes demanded of firms receiving funds to invest in equity-based investments represent a far higher bar than is required to participate in other forms of investment that may actually carry far higher risk.
Equally, it is easier for people to take on debt, the consequences of which can be much more financially devastating than simply making equity-based investments.
I can see the point of those who say far too much money is in cash and we need to make investing easier for consumers. But with asset values at astronomic multiples and a correction almost inevitable, is it a good time to urge inexperienced investors to take on more exposure without downside protection?
It is easy for people to say they are happy with risk in surveys but, when that turns to losses, they may be quick to look for someone to blame and to seek compensation.
There may be a case for easing suitably in a few areas but, generally, the current rules have evolved for good reason. A lot of the time, they have been introduced as a result of significant consumer detriment from sales or marketing activity.
We need to find ways to enable those willing and able to absorb risk to invest more easily, but avoiding negative returns must be a priority.
One route may be to take an approach similar to the rules that used to apply to certain classes of investment – i.e. if the investment is just for general savings, with no specific objective, a reduced suitability standard might apply.
That said, this must not be something that simply enables a small group of entrepreneurs seeking to maximise short-term growth and business exits. If this went wrong, the rest of the industry would be left to pick up the pieces and, inevitably, the costs.
I would be more convinced by arguments for changing regulations if the advocates proposed an alternative approach, demonstrating how it could be achieved while still providing a good level of protection.
I can certainly see ways in which tests could be applied to filter out more vulnerable savers and those for whom equity-based investment might not be suitable. Indeed, there are a number of new technologies that make this easier now than ever.
And despite those robo firms protesting current rules, many are building services that work well within the rulebook – not just for accumulation, but decumulation and even equity release.
Anyway, is the robo lobby even targeting the right audience for change? The role and mandate of the Financial Ombudsman Service is far more of a constraint to their objectives. They might well persuade regulators to change rules but the FOS can review cases without regard to law or regulation and award as it thinks fair.
Firms can allow that a certain percentage of traditional business will fail from a compliance perspective. The last time the FCA measured this in the adviser community, 4 per cent of cases were found faulty. But if you have an automated process, in theory if the FOS was to fail one case, that could suggest 100 per cent of cases might fail and warrant compensation. Equally, suitability is now a Mifid requirement. Have other EU countries raised the level of equity investment by consumers? If so, how have they addressed suitability?
ING has conducted behavioural finance research into differing risk attitudes across 15 countries and I think more research into why people do or do not invest is a better course of action than reducing consumer protection.
Opportunities exist all over the market to use automation to deliver lower-cost advice. With the FCA set to look at this subject again as it revisits the outcome of the Financial Advice Market Review, we should review the question of suitability requirements for all types of advice. In doing so, we must be careful not to change things for the wrong reasons.
Too often, when the industry has cut corners, it has ended in massive compensation payments. Let’s not undermine the transformation automation can deliver.
Ian McKenna is director of the Finance & Technology Research Centre