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'Where is the human?' Five robo firms react to FCA critique

Automated advice firms have welcomed a report published by the Financial Conduct Authority which was critical about firms' handling of suitability and disclosure.

Automated advice firms have welcomed a scathing appraisal of the industry's present shortcomings from the Financial Conduct Authority (FCA). 

The FCA's report, published yesterday, criticised automated advice and online discretionary investment management (ODIM) services for substantial failings in both suitability and disclosure. 

Assessing seven ODIM firms and three automated advice propositions, the FCA found that many investment services 'did not properly evaluate a client's knowledge and experience, investment objectives and capacity for loss'. 

The regulator highlighted that some firms were not asking about clients' knowledge and experience at all, while some 'streamlined' advice models lacked adequate fact finding and 'know your client' focus, instead relying on basic assumptions about clients. 

Some automated advice services recommended different transactions to those which took place at the end of the process, and a client could disregard the advice, thus muddying the 'insistent client' waters.

In some cases, vulnerable consumers were required to 'self-identify' as vulnerable. 

Meanwhile, fee disclosures were deemed 'unclear' and the FCA highlighted that some firms failed to clarify whether the service was advised or non-advised, discretionary or non'discretionary.

In its appraisal of overall governance, the regulator concluded: 'There appeared to be little consideration of auto advice-specific risks in firms’ governance processes.'

However, the FCA did acknowledge that this was an 'evolving market', and firms in this space have for the most part welcomed the regulator's tough love.

However, some commentators have also suggested that a fully automated and suitably compliant proposition is still a long way off. 

Automated advice firms have welcomed a scathing appraisal of the industry's present shortcomings from the Financial Conduct Authority (FCA). 

The FCA's report, published yesterday, criticised automated advice and online discretionary investment management (ODIM) services for substantial failings in both suitability and disclosure. 

Assessing seven ODIM firms and three automated advice propositions, the FCA found that many investment services 'did not properly evaluate a client's knowledge and experience, investment objectives and capacity for loss'. 

The regulator highlighted that some firms were not asking about clients' knowledge and experience at all, while some 'streamlined' advice models lacked adequate fact finding and 'know your client' focus, instead relying on basic assumptions about clients. 

Some automated advice services recommended different transactions to those which took place at the end of the process, and a client could disregard the advice, thus muddying the 'insistent client' waters.

In some cases, vulnerable consumers were required to 'self-identify' as vulnerable. 

Meanwhile, fee disclosures were deemed 'unclear' and the FCA highlighted that some firms failed to clarify whether the service was advised or non-advised, discretionary or non'discretionary.

In its appraisal of overall governance, the regulator concluded: 'There appeared to be little consideration of auto advice-specific risks in firms’ governance processes.'

However, the FCA did acknowledge that this was an 'evolving market', and firms in this space have for the most part welcomed the regulator's tough love.

However, some commentators have also suggested that a fully automated and suitably compliant proposition is still a long way off. 

Fiver a Day, run by Echelon Wealthcare principal Al Rush, was one of the firms involved in the review. 

Rush said his firm came out of the process well in comparison with the overall appraisal offered by the FCA, with just one or two small points made by the regulator about client vulnerability. 

He said: 'The main issue, if that’s the word, revolves around what happens when a client goes off piste or gets chucked out of the automated service.

'Seven out of the seven clients who remained within the process were deemed suitable, while three were unclear. They were unclear because the system worked and chucked them out or suggested they seek face to face advice.'

Rush followed up with those three clients and is confident that they are in a suitable position. He was frustrated that the headline figures did not reflect this, as suitability in these instances fell outside the scope of the review. 

'Cars didn’t have airbags when they started, but that didn’t mean they were unsafe,' said Rush.

'Similarly, robo is evolving. The FCA’s work is vital in ensuring that it stays on the right path, and evolves accordingly, and it was a very worthwhile review. It might not be perfect yet, but instant, immediate perfect should not be the enemy of good.

'I think that traditional robo, without hybrid intervention, is going to be very hard to roll out - indemnifiers are going to look at a model and read the report and say "where is the human?"'

Italian robo-adviser Moneyfarm also participated in the FCA's review.

Chief executive Giovanni Daprà said the regulator's feedback was welcome, and provided a 'useful update to existing guidance to help drive further technology-led innovation in the industry'. 

He added: 'Moneyfarm is proud to have been one of the first firms to offer regulated investment advice over a self-selection, execution-only model.

'This advice is crucial to ensure portfolios are suitable for customers and adds an additional layer of protection, anything the FCA does to level the playing field will undoubtedly benefit consumers.'

Anthony Morrow, chief executive of eVestor, said: 'I think suitability and appropriateness has always been a big problem for both the online advisers and also DIY investors, and this is a matter of time.'

Morrow explained eVestor sits behind regulated advice, and will inform a client whether or not they should be investing and into which product.

'This means that we do have a large percentage of users of our system who we tell not to invest,' he added. 'We can also track where those people go from our site having been told not to invest by us, typically they go to Google and search for another robo-adviser or DIY investment. We also provide access to human advisers through appointment.'

Morrow revealed the firm had been part of the FCA's advice unit which provides regulatory feedback to firms developing automated advice and discretionary investment management models. 'We were in it and it was a very positive experience as we got to build in the same room as the regulator instead of guessing,' said Morrow. 

The firm has just completed its first year trading with its basic proposition and is now investing heavily in technology, including its website, customer experience and portal, and its app, all of which Morrow aims to have ready by the end of this summer. 

He said: 'This is a fast moving space and certainly it is unlikely that the winning model is not out there at the moment.'

Nutmeg chief executive Martin Stead said the firm shared the FCA's desire to ensure 'all customers are getting a fair deal and an investment strategy which is suitable for their individual situation and needs'. 

He added: 'As the online wealth management industry grows, with many new entrants entering the market, we welcome tighter regulation and scrutiny to ensure that all firms are following best practice and delivering services that are in the interest of customers.

'Nutmeg was founded with a mission to empower generations of investors by using technology to make high quality wealth management available to more people, with a jargon-free and better value service.

'Our head of financial advice plays a vital role in the design of our risk assessment, financial planning tools, ongoing suitability and monitoring of client outcomes to ensure customers have investments that are right for them.'

Nutmeg consulted with the FCA prior to the launch of its regulatory sandbox, which aimed to drive innovation which might improve access to financial services. 

Stead said: 'We see our industry as the future and in order to flourish all providers should be on a level playing field.'

National advice firm LEBC has been operating a hybrid model which incorporates automation while underpinning its advice with ongoing and accessible human expertise. 

Director of public policy Kay Ingram said: 'Robo advice with no human intervention is unlikely to be suitable for consumers who need to make strategic financial decisions such as how best to prioritise competing demands on their time and money. Equally face to face human advice is not affordable for many.

'We believe the balance lies in bionic advice, this combines technological efficiencies with human empathy, cutting the cost of advice to make it more affordable, while retaining the important sense checking which only emotional intelligence can provide.

'Bionic advice has enabled LEBC to provide advice to many more consumers at an affordable cost.'

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