Robo firms’ shortcomings around suitability, fee disclosure and identifying vulnerable clients have been highlighted in findings from an FCA review today.
The regulator reviewed seven firms offering online discretionary investment management services and three firms giving automated advice.
The FCA says service and fee-related disclosures at most online discretionary investment management firms in its sample were unclear.
Some firms did not make clear whether their service was advised, non-advised, discretionary or non-discretionary.
Others also compared their fee levels with their peers in a “potentially misleading way”.
For example, they compared a non-advised, non-discretionary service with a discretionary service solely on a cost basis without explaining the difference in the nature of the service.
The review also highlights shortcomings in suitability assessments, with many firms failing to properly evaluate a client’s knowledge and experience, investment objectives and capacity for loss.
Some firms failed to ask clients about their knowledge and experience at all, as they felt their service was suitable for all individuals regardless of their investment knowledge and experience.
Regarding streamlined advice models, the FCA says that some automated advice services lacked adequate fact finding and ‘know your client’ focus, instead relying on assumptions about clients.
The report says: “We saw examples where clients could disregard advice given by the automated offering without any safeguards or risk warnings to prevent or challenge this.
“This created uncertainty about whether the business was transacted on the advice of the automated offering, or on an execution-only or insistent client basis.”
In some cases, robo advice services recommended a different transaction to the one that took place at the end of the advice process.
Most firms in the online discretionary investment management services sample were also unable to show they have adequate and up-to-date information about their clients.
Weaknesses were also found in automated advice services identifying and supporting vulnerable consumers, with some offerings relying on the client to self-identify as vulnerable.
The FCA concludes: “The market for both [online discretionary investment management] and auto advice services remains at an early stage, with a number of firms expected to launch services over the coming year. We continue to encourage innovation in automated investment services.
It says: “While this is an evolving market, our rules on suitability of advice apply regardless of the medium through which the service is offered. Assessment of suitability is the firm’s responsibility and our rules and principles apply equally to emerging automated offerings.”
The regulator adds: “We expect existing firms and new entrants into the market to consider the issues in this article and take action where needed. Future reviews will include an assessment of how firms are complying with new requirements introduced by Mifid II and whether the cumulative impact of these important regulatory changes (together with Priips) are working as intended.”