The FCA has published the findings of its recent Review into the fast-growing automated investment services market. The Review was split into two parts:
- A review of seven firms offering automated online discretionary investment management (ODIM) services. These are services where a client has given a firm responsibility to invest on the client’s behalf, within agreed parameters, on an ongoing basis.
- A review of three firms offering retail investment advice exclusively through automated channels (auto advice). This is where, in lieu of interaction with human financial advisers, customers receive automated advice on a one-off basis generated from information provided when first engaging a firm.
The FCA’s conclusions indicated a number of failings amongst firms in the automated investment services sector, including that:
- ODIM service and fee disclosures were unclear and at risk of breaching COBS 2.2.1R (giving appropriate information to customers) and COBS 4.2.1R (ensuring communications are clear, fair and not misleading)
- many ODIMs failed to conduct adequate suitability assessments in accordance with COBS 9 (ignoring the impact of MiFID2 which only came into force on 03 January 2018), often due to a belief that their services were suitable for all individuals
- many ODIMs failed to maintain in-date client information
- many auto advice providers using “streamlined advice” models (permitted since the FCA loosened its regulations in 2016 in the wake of the Financial Advice Market Review) also failed to conduct proper suitability assessments by over-relying on assumptions and failing to gather sufficient evidence about a client’s financial circumstances eg their debts and outgoings
- some auto advice firms allowed clients to disregard the automated advice generated without any risk warnings, creating uncertainty as to whether the business was transacted on the basis of the advice given or on an execution only basis
- some auto advice firms allowed human financial advisers to intervene in the automated process without recording the nature of the intervention, opening those firms up to issues in proving that they have provided suitable investment advice
- auto advice firms generally had weak processes for identifying and supporting vulnerable customers, with some offerings relying on the client to self-identify as vulnerable, and
- firms’ governance processes have not been sufficiently tailored to the provision of auto advice and the specific risks that these business models contend with eg cyber security risks.
As a result of these numerous failings, the FCA has sent feedback letters to the firms studied in the Review detailing expected improvements. For those firms looking to enter the market, the FCA encourages a consideration of its guidance paper FG17/8 - “Streamlined advice and related consolidated guidance”.
This recommendation would appear to go to the core of the issue. The FCA is determined that innovation in the development of automated investment services, which the FCA was keen to stress that it continues to encourage, must not come at the expense of a disciplined application of the COBS Rulebook to such services. Those looking to move into the sector will therefore need to work harder than the firms sampled to meet the FCA’s expectations in striking the right balance in streamlining automated investment services without neglecting the disclosure and “know your client” requirements imposed by COBS.
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