FCA review exposes robo advice failings

The Financial Conduct Authority (FCA) has expressed concerns, requesting many firms to make significant changes, following its recent review of robo advice offerings.

Seven firms offering automated online discretionary investment management (ODIM) and three firms providing retail investment advice solely through automated channels (auto advice) were assessed by the regulator as part of the review.

Unclear service and fee disclosures at most ODIM firms reviewed caused major concern for the regulator. Some firms failed to clearly explain whether their service was advised, non-advised, discretionary or non-discretionary.¹

Some firms were guilty of comparing their fees against peer services in a “potentially misleading manner”,¹ according to the review. For example, certain firms compared a non-advised, non-discretionary service with a discretionary service solely based on cost without explaining the difference in nature and level of service. ¹

FCA unhappy with standard of suitability assessments

The regulator was dissatisfied with the standard of suitability assessments conducted by many robo advice offerings. Some ODIM firms failed to fully “evaluate a client’s knowledge, experience, investment objectives and capacity for loss.” Other firms reviewed completely neglected to ask clients about their knowledge and experience as they “felt their service was suitable for all individuals regardless of their investment knowledge and experience,” according to the FCA report.¹

Low quality and quantity of information gathered by auto advice services about clients’ financial circumstances was also identified as an issue by the FCA. For example, certain services did not gather enough information about customers’ debt and other outgoings.

The review also found examples where clients could “…disregard advice given by the automated offering without any safeguards or risk warnings to prevent or challenge this.”  In the report the FCA stated: “Firms should consider how their processes and record-keeping might be improved to limit potential harm to customers.”¹

The report also exposed many firms for “weaknesses in identifying and supporting vulnerable consumers” while some auto advice service offerings were criticised for “relying on the client to self-identify as vulnerable.”¹

Significant changes made following review

Following the review, many firms involved have made, “significant changes to their disclosures and suitability processes,” according to the FCA. (Source 1)

The FCA stated they will: “Continue to work with firms individually to develop further improvements where necessary.”¹ 

They added: “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.” ¹

Sources
https://www.fca.org.uk/print/publications/multi-firm-reviews/automated-investment-services-our-expectations

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All figures correct as at 19.11.2018.