The Model Office Blog

The FCA Streamlined Slap for Robo's

[fa icon="calendar"] May 23, 2018 10:23:55 AM / by Chris Davies

During our tour of the UK last year promoting our RegTech platform Model Office, we made it clear that those firms employing the poorly named Robo-Advice solutions really needed to employ research and due diligence on the technology before employing it within their business proposition.

Robo-Advisers come in different breeds and can be placed into two camps: Those trying to compete and moving into the direct to client space and those empowering established B2C brands and financial advisers.

For those who are empowering the incumbent market distribution providers, this is a win-win strategy, as the cost to onboard clients is far less and they will act as an enabler platform to firms who wish to offer streamlined or focused advice to a section of their clients.

Yet this is where there is a large fly in the ointment and it’s called suitability. The FCA has now released their Final Guidance 17/08 which slams auto-advice solutions for effectively showing scant regard for the end user needs. This is the distributers job, I hear technology providers shouting.

Yes the adviser firms now need to ensure they have the new MiFID II driven product governance rules (PROD) nailed down and thus need to ensure they:

  1. Specify and Identify target market and categorise clients
  2. Assess risks relevant to their target market for each product
  3. Ensure products meet their client needs
  4. Ensure product distribution and their target market match
  5. Ensure their Product(s) are actually distributed to the target market

Indeed it doesn’t stop there, adviser firms also need to understand their products and investment propositions that sit within the auto-solution and ensure they are compatible with the segmented client needs.  

This all means advisers need to employ a filter system where they can identify clients that the service is not suitable for. For example; those clients with wider planning needs, poor knowledge, need debt management or emergence savings. So knowing the suitability requirements and how the play out against streamlined advice is essential.

Where the technology providers are concerned they do need to take ownership of how they structure their algorithms. FINRA produced research[1]in 2017 which showcased how 7 US based Robo-advisers offered wide and varied asset allocation solutions to the same client with clearly defined pension planning needs and objectives. This means advisers also need to sense-check the algorithms at play and again make sure they are suitable to meet their target market needs.

Adviser firms who want to employ streamlined advice services need to place governance around the auto-advice technology. This means assessing:

  • The algorithm theory, strategy, structure and data application
  • Portfolio construction and how this aligns with the target market needs
  • Costs are clear and fair
  • Attitude to risk and capacity for loss are clearly explained and again stress tested against the suitability rule
  • Cyber and data protection systems and controls are in place
  • Client interface and communications offer fair clear and not misleading information and a filtering system ensures the right clients are engaged and an exit strategy is in place for those clients the auto-advice solution is not suitable for
  • Clients understand fact finds and information required and the fact finds flag life stage data required such as marriage, child birth, career change or retirement

Simply put, technology is not magic or a panacea, it requires scrutiny to ensure it fits with both client and regulatory needs and the business proposition.

[1]Report on Digital Investment Advice FINRA 2016

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Topics: Financial regulation, Financial business development, Risk management, fintech, regtech, practice management, FCA, Constructive compliance, advice, HMT, suitability, FAWG, FAMR, Fitbit, MiFIDII, GDPR, Data, Chatbot, Culture, Enforcement, supervision, audit, Conduct, auto advice, streamlined advice

Chris Davies

Written by Chris Davies

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