The Model Office Blog

Are the Suitability rules Suitable for the Robo's?

[fa icon="calendar"] Sep 14, 2018 10:46:51 AM / by Chris Davies

With The FCA revisiting the implementation of MiFIDII and with the next Suitability review, and SM&CR also on their way, we are now seeing far more focus on disclosure, transparency, accountability and roles and responsibilities.

With the rise in Robo-advisers (Robo’s) we see both a regulatory opportunity and a threat.  Indeed The FCA Streamlined Advice review paper slammed the Robo’s apparent reluctance to engage suitability rules, our blog recommended adviser firms and Robo's alike need to take head of the  PROD rules and enact governance and due diligence across their fact finding and segmented client needs,  the Robo-proposition, costs, risk profiling, and cyber-risks.

Those Robo’s who can facilitate the much-coveted ‘suitable’ streamlined advice will be highly attractive for the baby boomers and the millennial's alike. You also have those Robo’s empowering financial advisers thus providing a ‘cyber-service’ to meet their client’s developing digital needs.  Indeed our latest consumer research shows the majority want a mix of human and Robo based advice.

But what is yet to be comprehensively addressed is the potential problems surrounding the underlying algorithms that power the Robo’s outputs. FINRA’s report on digital investment advice[1] showcased this with governance issues surrounding the asset allocations, based on the same client profile, produced by seven independent digital advisers, equity allocations ranged from 10% to 40%.

This example highlights the need to acknowledge any implicit trust with algorithms and encourage a ’four eyes’ and challenge approach to:

  1. The Methodological approaches embedded in the algorithms used
  2. Assess if these methodological approaches reflects the regulatory requirements for suitability
  3. Assess if these methodological approaches reflects the firm’s proposition

Added to this is the risk profiling, capacity for loss and portfolio analysis requirements aligned to suitability rulebook based on face-to-face advice. This all reinforces the need for Robo-adviser technology suppliers and distributers to establish and implement effective governance and supervision for their auto-advice solutions and also adhere to PROD which aligns advice and product manufacturing suitability requirements. Boring Money has written a good blog on this topic.

The answer lies with a new brand of FinTech known as RegTech. This technology allows firm’s to understand how their data, proposition and client service interacts with the regulations in real time. This means that RegTech could dovetail with any Robo solution and stress test its outputs against suitability requirements and PROD such as Know Your Customer for example.  This means that RegTech can assess and review a methodology a tool uses (included any assumptions made) against risk profiles and capacity for loss plus reported client needs and flag up any potential conflicts.

By applying RegTech, firms can ensure governance and risk management at lower cost and ensure they are using a pro-active strategy that assesses Robo outputs in real time and moves away from traditional tick-box reactive compliance practices.

[1]FINRA Report on Digital Investment Advice March 2016

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Topics: Financial regulation, Financial business development, fintech, regtech, Risk management, practice management, FCA, advice, HMT, suitability, FAWG, FAMR, MiFIDII, Data, GDPR, Chatbot, Culture, Enforcement, supervision, audit, Conduct, AI, Risk,, Accountability, Platforms, PROD, Product governance, Modeldrivenmachineexecutablerporting, digital,, Regulatory, Reporting

Chris Davies

Written by Chris Davies

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