Following the publishing of the 2017/18 Business Plan, the FCA has undertaken reviews of innovative areas of the financial markets. In a report published 21 March, the FCA presented its findings on automated investment services and its recommendations on improving this segment of the market.
Automated investment services, sometimes known as robo-managers or robo-advisers, are financial advisers which provide their advice through online channels, with moderate or minimal intervention from human advisers. As part of the 2017/18 Business Plan, the FCA has been monitoring developments and reviewing the services offered by a number of FinTechs in order to promote innovation and competition in the financial market. The FCA has recently concluded a review of seven automated online discretionary investment management services (“ODIMs”), where clients give the firm responsibility to invest on their behalf with parameters agreed on an ongoing basis, and three firms providing retail investment advice solely through automated channels.
The FCA carried out this review primarily to assess:
- The services provided to consumers by these automated investment services;
- The quality of suitability assessments undertaken by ODIM firms;
- The suitability of advice provided by automated advice channels;
- The level of support and quality of information provided to prospective customers;
- The governance and oversight of automated advice channels; and
- Whether the FCA’s supervisory work can address potential harm arising from these services.
The FCA’s findings can be divided into seven topics:
1. Service Disclosures
FCA rules require firms to provide appropriate information about their services, costs and associated charges in a clear way. This is to allow clients to understand the nature and risk of the services being offered so they can make informed decisions.
The FCA’s investigation found that the disclosures at most of the ODIM firms were not clear enough. Some of the firms did not make it clear as to whether their service was advised or non-advised or discretionary or non-discretionary. Others compared their fees to their competitors in a misleading way, such as comparing their own discretionary service to a non-discretionary one. Firms need to make sure that their fees are fair for the service being provided, as well as transparent and disclosed fairly. They must also ensure that communications are fair, clear and not misleading.
2. Suitability Assessments
Any firm offering advisory services must undertake suitability assessments to make sure the decision to trade is suitable for each client. Automated investment services are expected to meet the same regulatory standards as traditional discretionary and advisory services.
Many ODIM firms failed to properly evaluate their clients’ knowledge and experience, investment objectives and capacity for loss in suitability assessments. Some clients were not even asked about their experience at all; the firms felt their service was suitable for all clients. In the case of automated investment services, the FCA found clients could easily disregard the advice given by the automated system without any safeguards or risk warnings. Sometimes, an adviser intervened in the automated process without recording the nature of their intervention, leading to situations where it was difficult for the firms to prove the suitability of their advice. In some cases, automated systems did not even undertake proper ‘Know Your Customer’ checks, instead relying on assumptions about the individuals rather than gathering any information on the clients. Firms offering these services must consider how they can undertake the necessary background and KYC checks into their potential clients to meet the FCA requirements under the COB Rules.
3. Ongoing Client Relationships
If a client has an ongoing relationship with an investment adviser, it is necessary for the firm to keep up-to-date information on the client. This is necessary to ensure the initial investment remains suitable for the client over time.
Most of the firms in the review could not demonstrate they possessed up-to-date information on their clients in cases where they provided an ongoing service. The FCA has categorically stated that client information cannot be out of date or incomplete when undertaking decisions to trade.
4. Filtering Process
ODIM firms generally have provisions built into the online systems they use that filter out clients who have needs that will not be met by their particular service. The FCA has noted that it is crucial these tools are backed up by systems and control which make sure that they produce satisfactory results and are fit for purpose.
5. Vulnerable Customers
Automatic advice services were noted to have weaknesses in identifying and providing adequate support to customers who were considered to be ‘vulnerable’. In some cases, customers were relied upon to self-diagnose their vulnerability. While some firms did have training material on vulnerability, both ODIMs and automated firms need to look at ways to better identify such clients with the information they capture and provide them with the appropriate follow-up support.
6. Overall Governance
Firms providing automated advice appear to give little to no consideration to the governance risks specific to their businesses. Awareness of the need to stress test online systems and ensure proper cyber security was mixed and some of the firms lacked clarity over how the responsibilities were shared between the adviser and the network. These firms, in the eyes of the FCA, require more robust oversight systems, clear allocation of responsibility and better consideration of how their services will be affected by the online nature of their work, while looking for processes to address these concerns when they arise.
7. Financial Promotion
While financial promotion was not a key factor that was being examined by the FCA, the reviewers did note that compliance with the rules on presentation and ensuring communications were fair, clear and not misleading was a topic that often came up in discussion with both the ODIMs and the automatic investment firms. As the majority of this review took place before the implementation of MiFID II, the FCA stressed the need for firms to prepare for the new rule on presentation of future performance information.
The report went on to conclude that both forms of investment firm are still in their infancy and the FCA aims to encourage all types of innovation in automated investment services. However, the rules on suitability apply regardless of the manner in which advice is provided, and these firms still have a long way to go to ensure full compliance with the standards set out by the FCA.
The FCA has pledged to continue supporting innovative financial firms through its existing structures, such as Project Innovate and the Regulatory Sandboxes. The FCA will also continue to provide feedback to firms and will take action in cases where it appears that consumers may be harmed, using the regulatory tools at their disposal, such as early intervention and enforcement investigation. The FCA remains committed to the aims of the 17/18 Business Plan and seeks to undertake further reviews to assess compliance with MiFID II.