Robo-Advice: not so black and white?

15 February 2017. Published by Matthew Watson, Partner

The Chairman of the FCA, John Griffith-Jones has provided an insight into the Regulator's concerns that the advent of technological developments has blurred the distinction between when customers are receiving advice or guidance.

In a speech on Monday night to the Cambridge Judge Business School Mr Griffith-Jones talked of the apparent difficulties the FCA is having in distinguishing between regulated advice and guidance with the increased popularity of technology platforms and robo-advice. There were concerns raised that the "remorseless march of technology" means that rules that were designed for paper-based advice do not always neatly translate when services are provided in a technology format.

The comments made by Mr Griffith-Jones highlight the apparent conflicting policy approaches being adopted by the Regulator that on the one hand wants to encourage alternative technological developments through the likes of the Regulatory Sandbox and Innovation Hub and on the other hand want to ensure the regulation of services provided in an electronic format remains fit for purpose.

The concerns raised about the "greying" of the distinction between advice and guidance are made against the backdrop of the HMT's consultation on the changing definition of advice which concluded last month. We will have to see whether the Chairman of the Regulator's recent comments have had any bearing on the proposed rules implementing MiFID II requirements which are due to be published later this year.

Interestingly, there was also a reference in Mr Griffith-Jones speech to, "Artificial Intelligence puts the pooling of risk via insurance under pressure as individual odds become increasingly forecastable". It remains to be seen how "forecastable" such risks can be calculated however it goes without saying that robo-advice undoubtedly creates a potential systemic mis-selling risk.  Mark Carney recently noted "robo-advice and risk management algorithms may lead to excess volatility or increase pro-cyclicality as a result of herding, particularly if the underlying algorithms are overly sensitive to price movements or highly correlated" (see his speech here).

As we too have noted before this is a view shared by the European Banking Authority who identified in their Discussion Paper released at the end of 2015 that the increase in automated technology results in a significant number of consumers transacting in the same way which can potentially create a "herding risk" resulting in a volume of complaints – or "systemic or recurring problems". One risk is therefore that technology services cross the bridge from providing guidance to more bespoke advice which could result in a wide-scale problem if not properly managed from the outset.

The development of technological advice platforms seems unavoidable and will require careful consideration by the Regulator to ensure that advisors are provided with clear and transparent rules in the brave new world of robo-advice. The Regulators own concerns about the greying of the distinction between advice and guidance will be very worrying to existing and start up advisors trying to operate within the Regulations. We will have to wait and see whether matters become more black and white but with the FCA torn between policy and politics and the Treasury and industry it is no surprise that the rules and their application remain confused and confusing.

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