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Ian McKenna: Robo-advisers have no right to special treatment

robo-advisersRobos should not be able to act like advisers yet shirk the regulatory responsibility incumbent on them

Reports suggest a group of robo-advisers is planning to lobby the FCA for softer regulation than that which traditional advice firms must adhere to. This is a huge mistake.

Asking for diluted regulation and, by definition, a reduction in consumer protection would be manna from heaven to those that argue digital advice is the poor relation of traditional processes.

While the issues identified in the FCA’s recent review paper on the subject present challenges to such businesses, it is essential they rise to them. Emerging digital propositions already benefit from a level of access to the regulator that conventional advisers can only dream of.

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The FCA has rightly embraced the opportunities offered by digital solutions, creating Project Innovate and the Advice Unit.

But there have been a number of times over the last few years when I have looked at new offerings and questioned whether they have met UK regulatory requirements.

Indeed, I have come across many situations where senior executives within start-up digital advice firms have failed to grasp the more complex detail of our assessing suitability regime.

Is this a reason to dilute that regime? Far from it. Rather, it identifies the need for robos to have a better understanding of the regulatory requirements. If some are finding it difficult to meet the high standards for advice, surely that is a powerful validation of the process?

For those that cannot reach such high standards, there is the option of going down the non-advised route, of course. But non-advice must be exactly that.

There is no room for firms to act like advisers and behave like them but not take the full responsibility incumbent upon advisers.

Such lobbying shows a lack of understanding of the full regulatory landscape in this country.

Even if concessions could be gained from the FCA – and I very much doubt they will – there is still the question of how to address the Financial Ombudsman Service with its power to ignore both regulation and legislation if it sees fit when awarding in favour of a complainant. Perhaps the lobbying raises questions over the extent to which advice can be fully automated at this time.

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That said, there are some very sophisticated solutions being created. I have been really impressed by a number of firms in recent months – Hub Financial Solutions and Wealth Wizards, to name just a couple. They are by no means the only ones meeting such high standards. And, unsurprisingly, the most impressive solutions seem to be coming from firms used to working in the advice sector – a sector where high standards are just part of doing business.

While there is no doubt we will eventually see highly sophisticated artificial intelligence engines capable of crunching vast amounts of complex data to deliver an unparalleled level of options to consumers, humans will continue to play a crucial role in helping them understand this information for now.

Robo-rumble: Will FCA scrutiny stop digital services moving further towards advice?

If there are some in the robo-advice community that do not feel they are able to work to the same high professional standards as human advisers, they need to rethink the future of their businesses rather than asking for special treatment from the regulator.

Over the last eight years, the FCA has raised the bar in terms of what it expects of advisers, wealth managers and private offices.

If each of these groups can comply, there must be no softer option.

The risk to consumers simply cannot be justified.

This is a classic case of being careful what you wish for. It is widely recognised that if you can meet the regulatory standards in the UK, you can meet advice standards anywhere in the world. This is something robo-advisers should embrace, not resist.

Ian McKenna is director of the Finance & Technology Research Centre

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Quite right – good article Ian.

  2. A computer can’t prioritise with a client, question and agree a course of action.
    We use Truth software and arguably it does the “Robo” bit as did the software Lloyds Blackhorse had when I worked for them between 96 and 98 and Natwest had similar from 1993 when I worked for them up to 96.
    The “needs” based software invariably ended up with solutions which were not financially or more importantly emotionally viable to the consumer and it needed human intervention to add the nudges to get the consumer over the finish line to do the nearest to the right thing they could afford and emotionally commit to.
    Robo never will be “advice” it is just assisted purchase.

  3. Old school financial advisers are always going to moan about disruptors that threaten their fees.

    Reference to robo-advisers is wrong anyway, many are just online investment managers.

    Many don’t offer advice or personal recommendations, they are execution only services where the customers chooses for themselves. They are caught up in suitability rules designed for advisers that hark back to the pre RDR era.

    They offer a valuable service to customers that traditional advisers are turning away because of their minimum wealth requirements and high fees.
    It seems sensible for the regulator to consider amending the rules to enable any investment manager, digital or not, to loosen barriers to entry for people wanting to invest small amounts.

    After all those people can put money in the lottery, gamble, trade commodities and stocks including bitcoin, invest in equity via crowdfunding without any checks. Wouldn’t it better that they started investing with a low-cost, low volatility, no-notice, diversified, managed investment?

    Suitability rules require investment managers to check that their customer has knowledge & experience of investing. Do we think that’s necessary for someone who’s investing £100?

    Suitability rules require execution-only investment managers to check that the risk that the customer selected for themselves is aligned to their general attitude to risk. People don’t want to be told and typically the amounts they are investing are a small proportion of wealth and it would be fine if they choose to be more risky.

    Should Camelot have to test that customers have chosen the appropriate lottery ticket for their means?

    The investment management suitablility rules seem utterly out of line with the consumer protections in place for everything else in society.

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