Speech by Bob Ferguson, Head of Department, Strategy & Competition Division, FCA
Speaker: Bob Ferguson, Head of Department, Strategy & Competition Division, FCA
Event: Westminster and City: 2017 Annual Conference on Robo Advice and Investing: From Niche to Mainstream
Delivered: 11 October 2017
Note: this is the speech as drafted and may differ from the delivered version
- We see automated advice as a valuable vehicle to help tackle the issues faced by those consumers who are unserved or underserved by more traditional advice models, as well as promoting competition in the UK financial advice market.
- Our Advice Unit continues to be active in providing regulatory feedback and external tools to firms developing an automated advice (or guidance) model. Use it!
- Automated advice brings its own risks, of course, but well-designed models have great potential for compliance risk reduction.
- We will supervise with a focus on outcomes – the suitability of recommendations for the consumer, acting where we see harm – a guiding principle set out in our Mission document.
Robo advice is clearly one route through which disruption and competition can be boosted.
From one point of view, there’s nothing particularly special about robo advice. It is just another way of giving financial advice. The main obligations on providing financial advice are neutral on channel. You still have to adhere to MiFID, AML rules, and so on.
Nevertheless, there are two big reasons why robo advice presents a big opportunity, to my way of (regulatory) thinking.
The first reason - we promote innovation as part of the virtuous circle of competition, where competition is a very powerful driver of innovation and vice versa. Robo advice is clearly one route through which disruption and competition can be boosted – delivering economy and efficiency and reaching underserved consumers.
How that process of competition takes place is often best determined by the
market. It may be new start-ups challenging incumbents. Or those large incumbents
working in partnership with innovators to challenge the status quo. Or ideally a healthy
mix. We believe regulation has a part to play in making sure the right conditions exist for that competition. For example, our Regulatory Sandbox was the first of its kind.
And remember that the FCA has, quite unusually amongst financial services regulators across the globe, a competition mandate. We have the objective to promote competition because of the benefits effective competition provides for consumers, firms and the wider economy.
We do a number of things to promote competition – undertaking market studies that take a fundamental look at how markets are operating, enforcing competition law, and publishing guidance on our rules to give greater clarity and reviewing our own rules where they may unduly inhibit competition and the ability to innovate.
And my second reason - let us look at the issues identified by the Financial Advice Market Review, which we carried out jointly with the Treasury and which reported in 2016. The review concluded that steps needed to be taken to make the provision of advice and guidance to the mass market more cost-effective as well as addressing consumers’ lack of confidence when making financial decisions. In addition concerns were raised about a gap in the advice market. As Andrew Bailey recently noted in his Mansion House speech, the gap is likely to be exacerbated by low interest rates, making the cost of advice look less favourable when compared to potential returns. Those with smaller amounts to invest would certainly feel the effect of advice charges on their savings, making more traditional advice perhaps less affordable relative to the smaller amount of the investment involved.
In addressing these issues, FAMR recognised that new technologies could play a major role in driving down the costs of supplying advice and enabling firms to engage with consumers more effectively. If the human adviser can’t serve those with relatively low amounts to invest in an economical way, then the automated model may be of great help. That’s not to say the adviser has to be completely out the picture. Automated advice services offer a range of solutions, for example hybrid models that combine algorithms with human interaction. I don’t suggest that there is a silver bullet to address the concerns raised through FAMR, but automating advice, or aspects of it, shows promise in the context of efforts to tackle the question of how to reach unserved and underserved consumers.
But of course the two reasons I outline – the potentially benign competitive consequences, and the needs identified by the Financial Advice Market Review – cannot just prompt some kind of uncritical optimism about robo advice.
They are prompts for regulatory action.
Dispelling regulatory doubts: the FCA’s Advice Unit
The FCA’s Advice Unit is one example of our activity. It has two goals:
- One, to provide regulatory feedback to firms who feel they face roadblocks to developing an automated model. Firms might feel there are ambiguities in the rules that we can provide feedback on, for example via an informal steer.
- And two, to develop general tools that all firms providing advice to consumers can access. In the summer, we published a document signposting various rules which are likely to be relevant to firms providing advice. We also consulted on guidance based on the experiences of the Advice Unit, including anonymised case studies. We believe this guidance will offer firms further clarification about how the regulatory framework applies in specific circumstances. The case studies are based on real-world challenges.
To give you a flavour, I can share with you some common areas firms have asked for feedback on. These include dealing with consumers with uncertain needs, firms’ regulatory responsibilities when providing personal recommendations, dealing with consumers who are unwilling to take any risk with their capital, and the timing of disclosure of advice charges.
We’ll continue to see where we can add value on this front, and we plan to share more case studies in the future as the Advice Unit builds its wealth of knowledge.
At the time of speaking, 20 firms have been accepted into the Advice Unit, ranging from ambitious start-ups to large and familiar names – their names are on our website. We now also accept applications at any time, rather than in fixed windows. So we expect that number to rise.
But that’s not the biggest change the Advice Unit has undergone. We initially limited our focus to the investments, pensions and protection sectors. In June we announced a step-change. That included expanding our scope to mortgages, insurance and debt counselling. And covering not only regulated advice in these six sectors, but guidance models too. Furthermore, technology suppliers not necessarily seeking authorisation are now eligible.
We’re also available to provide regulatory feedback to discretionary investment managers who are developing automated models. Online wealth managers are part of the solution to providing access to investment for the mass market, and on this basis we are keen to talk with firms about any ideas they may have.
So – we think that by actively dispelling regulatory doubts, we can help deliver on our objective to promote competition. Do look at the FCA’s webpages on the Advice Unit for more details about how to apply.
Emerging themes in robo advice
We held a three day robo advice forum back in the autumn of 2015, including presentations from various innovators showcasing the automated models they use.
Three themes that emerged stick in mind.
- One was the expectation that a typical model might emerge that is a hybrid of human plus automation rather than purely robo advice. Two years on, we’re not ready to answer with any certainty whether this will be the case as we look forward. But it’s true that one of the areas of feedback that the Advice Unit has been asked about has been combining human intervention with automated advice processes.
- Another theme was that many people don’t search for financial advice or guidance. Customers search for product words such as ISA or pensions, not financial advice. If that’s right, what does that mean for the customer journey? What I would say is that this demonstrates the importance of firms beings clear about the nature of the service they are offering (advised versus non-advised, wide scope versus narrow scope).
- The third theme was about how robo advice, like most aspects of financial services, reaches beyond national borders. I am sure we will see that become even more evident over time.
In Australia, for example, automated advisers are subject to the same regulatory regime as conventional advice models, much like here, and both they and the Canadians have released guidance for firms on complying with existing rules. In the US, regulators have issued a consumer alert on the risks and tools of automated investment tools and services, and in New Zealand, regulators are considering amending existing legislation to make the provision of automated advice possible for the first time.
But you can never just drag and drop. Imported robo advice models may not meet UK regulatory requirements such as suitability, pensions switching and anti-money laundering requirements. So yes – bought-in models need to be adapted to the local environment.
But an application to our Advice Unit can, as I explained, be helpful for sorting out the adaptation issues.
What about the risks? Given our consumer protection objective, there is an important balance to strike. As I have said, our rules are technology neutral and the mode of distribution does not change the requirement that firms only recommend financial products which are suitable. Different modes of distribution have different risks and it is important that firms manage these risks appropriately. A robo model can help mitigate some of the risks associated with human advisers and managing a large salesforce. But the design of the model is crucial – a poorly designed model could lead to systemic mis-selling.
Managing this risk, and others, is ultimately the responsibility of the firm and its senior management. This responsibility isn’t reduced if the firm uses third party suppliers to help with the technology part – it rests with the firm offering the system. And if, for example, your method of profiling the risk appetite of the client is flawed, it is no more defensible because you sourced the model externally.
Our approach to supervision
We are focused on outcomes, it is above all about what the model generates.
Thinking about the risks prompts a question about how the FCA will supervise robo advice models and their algorithms. The answer is that we are focused on outcomes. That is to say, it is above all about what the model generates. We have been monitoring developments and, over the next few months, we will be undertaking assessments of some of the active market distributors in the investment sector.
In the context of authorisations, expect to see critical challenge on the client journey and other aspects of robo models.