Automated Advice – Opportunities and Challenges

19th April 2018 1581 - Article - Regulatory Updates

Automated advice (also referred to as ‘robo’ advice) has the potential to affect all financial services firms as it seeks to provide traditional investment and financial services, both regulated (such as advice) and unregulated (such as guidance), cheaper and quicker than traditional firms. It essentially replaces human interaction and decision-making processes with algorithms.

With improvements to technology and in particular artificial intelligence, the FCA has had to consider ways in which to regulate these activities. Algorithmic trading has been commonplace for some time but having a ‘robo advisor’ provide real-time and actionable financial advice has not. The FCA appreciates that artificial intelligence will help customers access affordable automated advice or guidance but this is not without its challenges. The FCA has considered these challenges as part of its Financial Advice Market Review (FAMR), with finalised guidance on ‘streamlined advice and related consolidated guidance’ published in September 2017 (FG 17/8). The FCA has also created Project Innovate to further innovation within financial services, and the Advice Unit to specifically support the provision of automated advice.

The FCA prioritises financial technology (Fintech) because:

  • They have a duty to promote competition in the best interest of consumers
  • Technology aids in accessing financial markets and improving the consumer experience

Project Innovate was launched in October 2014 to allow the FCA to provide practical support to new and established businesses who want to introduce innovative financial products. Firms on the program can experiment in the Sandbox with new products without all of the usual regulatory requirements.

Thereafter the Advice Unit was launched in June 2016 to provide regulatory feedback to firms developing automated advice models to deliver lower cost advice and guidance to consumers. The Advice Unit provides two main services:

  1. Individual regulatory feedback
  2. Published tools and resources

Since June 2017 the Advice Unit also accept firms that want to provide guidance instead of regulatory advice. This includes firms who are not intending to seek authorisation.

What are the opportunities and challenges from ‘automated advice’?

In many respects, the opportunities cause the challenges. For example, one of the opportunities of artificial intelligence is the reduced overhead cost of staff conducting routine tasks, such as collecting investment information and risk profiling. However, this leads to job losses and in many instances, investors prefer human interaction, clear decision making processes and good customer service.

Some of the opportunities can be grouped as follows:

(1) Low cost alternative to traditional services (particularly where they are routine tasks);

(2) On the basis that the advice/guidance provided is based on algorithms, customers will have access to the services 24/7. This increases accessibility for the ordinary customer and provides them with greater control;

(3) The FCA is in favour of increasing access to appropriate and affordable advice/guidance and is actively considering how to regulate these services, as can be seen from its updated guidance post the FAMR;

(4) It could be argued that it removes human biases and will provide consistent advice/guidance based on algorithms from the information disclosed.

Some of the challenges can be grouped as follows:

(1) Artificial intelligence will lead to job losses and eliminate human interaction. Take the following example: a parent wants to leave their offspring money in the most cost efficient way e.g. by reducing inheritance tax. An automated service may simply tell them to start transferring money to them. However, with a bit of investigation, an advisor may have uncovered that the offspring is irresponsible with money; in such instances the advice would be different;1

(2) How do you draw the line between advice and guidance? One is a regulated activity, one is not. Any robo advice must be careful not to stray from guidance to advice if the service provider is not regulated to do so;

(3) In terms of risk profiling, if a question uses complex language or assumes a basic level of financial knowledge which causes the customer to provide incorrect answers, the algorithm will likely provide the wrong automated advice/guidance. In contrast, a financial advisor may have corrected any misinterpretation or provided further guidance to extract the most appropriate answer.

What should you be considering?

If you wish to use artificial intelligence, then you should:

(1) Determine whether the outcome of the robo advice is actually advice, as this is a regulated activity and cannot be provided without regulatory permission. Regulated advice is covered by the compensation scheme;

(2) Ensure that during the fact finding process, any questions used to extract information from the customer are done in layman’s terms so as to avoid incorrect answers or misinterpretation;

(3) Consider using artificial intelligence for a limited purpose. For example, not all customers (especially in these early stages) are comfortable receiving advice in this way and with no face-to-face/advisor contact. Just because the end advice is provided by an advisor, does not mean artificial intelligence cannot be utilised.

Policy Statement

At the end of the FAMR consultation period, the FCA released a full guidance statement with respect to streamlined services and related consolidated advice. Under section 2.4 the FCA made it clear that streamlined services from their perspective might include ‘robo advice’ as well as more traditional face to face or telephone-based models. Within this guidance there are a number of case studies to inform firms of their obligations when providing fully automated or semi-automated advice.

How we can help?

Lawson Conner has worked extensively with its clients to assess the impact of new technology and regulatory change relevant to automated advice. We would be delighted to discuss how we can help support your organisation to meet these new regulatory challenges. Lawson Conner’s team of compliance professionals can assist you at every stage as you seek to comply with the new guidance.