FCA Backs Robo-advisers to Plug the Advice Gap
The UK’s financial watchdog – The Financial Conduct Authority – has set out a string of rules for robo-advisers and others offering so called ‘simplified advice’ in a bid to encourage their development and make certain forms of financial guidance safer and more widely accessible.
The rules pave the way for firms that offer simplified advice to do so at a lower cost to those seeking pensions advice, or to younger people saving for a deposit on a property or creating a nest egg for their children.
The changes were announced by Christopher Woolard, executive director of strategy and competition, announcing that the FCA was ‘committed to leading the charge’ in FinTech innovation.
In line with its ambition to make financial advice more widely available, the regulator noted that a younger, perhaps less wealthy, investor may not be able to afford, or may have less need for, a ‘full’ advice service, whilst older people might benefit from a simpler process.
The Financial Advice Market Review (FAMR) in March 2016 highlighted the high cost and accessibility of advice and the regulator said it wanted to encourage the growth of robo-advisers as a way to offer investment help to a greater number of people.
‘a younger, perhaps less wealthy, investor may not be able to afford, or may have less need for, a ‘full’ advice service’
As part of the proposals announced this week, the FCA suggested developing clearer rules to allow companies to give ‘streamlined advice’, a form of financial advice for consumers with relatively simple needs; this ranges from fully automated advice to a simpler telephone or face-to-face interaction, doesn’t involve a full fact find and is therefore often quicker and cheaper.
The watchdog made it clear that it expected any funds offered to investors by robo-advisers offering streamlined advice to be suitable for customers’ risk tolerance and investment objectives, calling on firms to tread carefully to ensure that people end up with the right product.
It urged firms to take care with their wording when trying to work out the level of risk a customer is willing to take with their investments; emotive language or unclear and overly complex questions must not skim past the nature of the risks involved, and risk questionnaires must not assume ‘a high level of financial capability’.
The regulator also stated that businesses should have a ‘clear idea’ of what type of person an applicant is, recommending that a filtering process be used to establish early on if a particular service is appropriate for the consumer; it recommended that robo-advisers should pay particular attention to the design of their website and the way in which customers interact with it.
The new regulations will be seen as a major boost for automated platforms looking to fill the advice gap created by the government’s 2012 Retail Distribution Review; seeking to deliver universal access to financial advice, RDR had the polar opposite effect as those faced with fee based advice baulked at paying £150 an hour for a service that had previously apparently been ‘free’, and advisers withdrew their support from those with less than £100k of investable assets on the basis that they were unprofitable.
‘a major boost for automated platforms looking to fill the advice gap’
The FCA’s ‘Project Innovate’ saw the creation of the Innovation Hub and advice unit with the aim of ‘encouraging innovation in financial services in the interests of consumers’, and the latest move can be seen as the regulator getting fully behind robo-advice as the answer to the nation’s advice gap.
The new rules will allow those companies that have been developing their products in the light-touch regulatory ‘sandbox’ to roll out a range of digital services; automated guidance will now join companies developing automated advice, pension and protection platforms.
However, the FCA did warn that some financial products are inappropriate for a simplified advice process and that more complex or illiquid products would require more details about a client’s broader portfolio.
Overall this will be seen as a most positive endorsement of the FinTech innovators as they will be able to roll out their services in the comfort of a supportive regulatory environment seeking to find solutions rather than to put metaphorical logs on the line.
Government encourages financial self reliance
It is a significant step as the government strives to encourage people to take more personal control of their finances; the new financial year sees a hike in the ISA allowance to £20,000 and there is an evolving range of investment options to ensure that there is something for everyone, regardless of how little disposable income they have, how little time they wish to devote to it and how little experience they have in investing or matters financial.
The number of people choosing to take full control and make individual investment decisions (‘Do it Yourself’ investing) is burgeoning and platform technology delivers unprecedented levels of information, data and social interaction in support of these relatively sophisticated investors.
Those wishing to be availed of a hands off – ‘Do it For me’ – approach can choose between appointing an expensive, human, discretionary investment manager, or can sign up to one of the increasing number of automated investment managers for a simple, convenient and cost-effective solution.
The FCA’s most recent announcement paves the way for an acceleration in the delivery of ‘Do it With me’ solutions whereby those with relatively uncomplicated requirements, but preferring support to be on hand if required, will doubtless soon be able to find a suitable service.
This is likely to deliver a boon in the adviser space that would have been difficult to have forecast just a couple of years ago when all talk was of large numbers of fifty-something advisers putting away the Hob-nobs forever; however, rather than delivering full blown advice to maybe a hundred clients, the new breed is likely to be able to service a thousand clients by providing a fleshy front end to an automated investment process, whilst mopping up the gravy by offering bespoke advice in exceptional circumstances, and widening their offering to include services such as loans and protection.
With an increasing number of options available, remember – ‘Just Don’t do Nothing’
You can find out more here: robo advice