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FCA finds suitability failures in automated advice services

29 May 2018

Automated advice firms are falling short on suitability and service, a review by the FCA has found. 

The regulator looked at seven firms offering automated discretionary investment management services and three firms providing investment advice exclusively through automated channels.

The findings showed that 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,” the FCA reported.

Some firms also compared their fee levels against peer services in a “potentially misleading” way, such as comparing 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 found shortcomings in the suitability assessment. Automated investment services firms must undertake a suitability assessment to make sure that a personal recommendation or a decision to trade is suitable for each client. However, the findings showed that many firms did not properly evaluate a client’s knowledge and experience, investment objectives and capacity for loss in their suitability assessments.

“Some firms did not 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,” the FCA reported.

Firms offering auto advice services use a ‘streamlined advice’ model to make a personal recommendation, but the review found that some services failed to carry out sufficient fact finding and ‘know your client’ focus, instead relying on assumptions about clients.

The regulator said that overall, it was “not satisfied with the strength of information gathering about clients’ financial circumstances.” It noted that services failed to request or gather adequate information about clients’ debt and other outgoings.

The review said: “We expect automated investment services to meet the same regulatory standards as traditional discretionary or advisory services. This means taking a proportionate approach to information gathering while maintaining the appropriate level of client protection.”

The report also highlighted that in some cases, the transaction recommended was different to the one that took place at the end of the advice process. It warned that clients could disregard advice given by the automated offering without any safeguards or risk warnings to prevent or challenge that from happening, creating uncertainty about whether the business was on the advice of the automated offering, execution-only or insistent client basis. In some instances, an adviser intervened without recording the nature of the intervention.

“Firms should consider how their processes and record-keeping might be improved to limit potential harm to customers,” the review stated.

Weaknesses were also identified in firms maintaining adequate and up-to-date information about their clients, as well as recognising and supporting vulnerable consumers.

The FCA concluded: “The market for both ODIM 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.

“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.”

Jon Greer, head of retirement policy at Old Mutual Wealth, said: “Since pension freedoms, and the subsequent surge in defined benefit pension transfers, access to high quality financial advice is more important than ever.

“The FCA’s review into automated advice has noted some problems with these models, for instance how they can identify vulnerable customers. As these growing pains are worked through we are likely to see more hybrid models which combine the strengths of face-to-face advice with those of an automated process.

“The journey to 24/7 financial advice provided by robots has not been as swift as anticipated and this review offers an opportunity for reflection on how technology best fits within the financial advice industry. Findings from the regulator’s further investigations will be hotly anticipated.”


Professional Paraplanner