The Financial Conduct Authority (FCA) has blasted automated advice and online discretionary investment management (ODIM) services over suitability failings and 'unclear' charges.
The regulator reviewed seven firms offering ODIM services and three firms providing automated retail investment advice, and found substantial shortcomings on disclosure and suitability.
Assessing firms against COBS 9, the FCA found that many firms ODIM services ‘did not properly evaluate a client’s knowledge and experience, investment objectives and capacity for loss in their suitability assessments’.
It added that some firms did not ask clients about their knowledge and experience at all, falling foul of COBS rules requiring a firm to gain sufficient information about a client’s relevant knowledge and experience, financial situation and investment objectives before making a recommendation.
After looking at automated ‘streamlined’ advice models, the FCA said: ‘Some services lacked adequate fact finding and 'know your client' focus, instead relying on assumptions about clients.
‘In general, we were not satisfied with the strength of information gathering about clients' financial circumstances. For example, some services failed to request or gather adequate information about customers’ debt and other outgoings.’
In some cases, the FCA found, automated advice services recommended a different transaction to the one that took place at the end of the advice process.
The report added: ‘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.
‘Sometimes an adviser intervened in the automated process without recording the nature of the intervention. In these instances it would be difficult for firms to show the suitability of the advice provided.’
On disclosure, the regulator reported that service and fee-related disclosures at most ODIM firms were ‘unclear’, with some firms failing to clarify whether the service was advised, non-advised, discretionary or non-discretionary. Others reportedly compared their fees against peer services in a ‘potentially misleading way’.
The regulator also highlighted that most ODIM firms were unable to show that they maintained adequate and up to date information about ongoing clients.
The report also lambasted automated advice services for their handling of vulnerable consumers, highlighting that some offerings relied on the client to ‘self-identify as vulnerable’.
In its appraisal of overall governance, the regulator concluded: ‘There appeared to be little consideration of auto advice-specific risks in firms’ governance processes. For example, awareness of the need for adequate stress testing and cyber security was mixed (this included considerations such as testing around sales volumes, developing action plans to address losses of connectivity or other eventualities, and continuing to test systems past-launch).
‘There appeared to be confusion within some firms as to the nature of the auto advice service being provided. While some networks were able to show clear oversight of the auto advice proposition, other networks lacked clarity over how responsibilities were shared between the adviser and the network.’