“Some services lacked adequate fact finding and ‘know your client’ focus, instead relying on assumptions about clients”, the UK regulator says.
The UK Financial Conduct Authority (FCA) has earlier today outlined its expectations regarding automated investment services providers, following two reviews into such companies.
- The first review looked at 7 firms offering automated online discretionary investment management (ODIM). This is where the client has given the firm responsibility to invest on the client’s behalf, within parameters agreed with the client, on an ongoing basis. At the time when the review was carried out, these firms represented over half of the firms in this particular market segment.
- The second review looked at 3 firms providing retail investment advice exclusively through automated channels (auto advice), where customers do not interact with human financial advisers. The advice is given on a one-off basis. Let’s note that at the time of the review, these firms were the early entrants to this developing market. The FCA aims to review more firms active in this market later in this financial year.
Regarding the FCA’s expectations, its rules require firms that provide automated investment services to give clear and appropriate information about their services, costs and associated charges.
Firms offering auto advice services use a ‘streamlined advice’ model to make a personal recommendation, the FCA explains. The review has found that some services lacked adequate fact finding and ‘know your client’ focus, instead relying on assumptions about clients.
In general, the regulator is displeased with the automated advice firms’ strength of information gathering about their clients’ financial circumstances. For instance, some services have failed to request or gather adequate information about customers’ debt and other outgoings.
Furthermore, in firms providing auto advice services, the FCA has detected weaknesses in identifying and supporting vulnerable consumers, with some offerings relying on the client to self-identify as vulnerable. Some firms had training material about vulnerability. However, firms should consider whether they could better identify vulnerable clients based on information captured from the automated advice offering and then provide appropriate follow up support, the regulator says.
Also, in a number of cases, auto advice services recommended a different transaction to the one that took place at the end of the advice process. The FCA 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. Moreover, 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, the FCA warns.
Further issues are related to governance. There appeared to be little consideration of auto advice-specific risks in firms’ governance processes. For instance, awareness of the need for adequate stress testing and cyber security was mixed.
Management information for auto advice services focused on compliance, marketing and PR, operations and risk issues, the reviews show.
Moreover, 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.
The FCA said it had provided feedback letters to the firms in its reviews. As a result many firms have made significant changes to their disclosures and suitability processes. The regulator says that if it sees poor practices that could cause harm to consumers, it will take action using appropriate regulatory tools, including early intervention or enforcement investigation where needed.