The normally sober Financial Times described the FCA’s critique of the burgeoning robo sector as “searing” and “damning”. Many of the firms reviewed by the regulator did not warn customers properly about risk, were unclear on charges, and didn’t know enough about customers to provide good-quality advice, the FT pointed out.
This is bad news for robo advisers, right? A regulatory crackdown is surely the last thing innovators in this sector need as they work to get new services up and running, serving more customers and earning a crust?
Wrong. While there will undoubtedly be some short-term pain to bear from greater regulatory scrutiny, robo advisers and similar services will be better off in the longer term for going through this process. In a world where their potential customer base currently has deep-seated suspicions about both the financial advice market and new technologies, robo advisers need to establish themselves as trustworthy, reliable and beyond reproach.
This won’t happen without high standards of regulation; people need to see that far from being a gimmick with limited appeal, online financial advice is a potentially valuable solution for the mass market that is properly policed by financial watchdogs. Only when its credibility is firmly established in this way will more people start to consider using a robo service.
Let’s be clear. Technology has a crucial and positive role to play in ensuring the financial services sector is able to help more people make better provision for their future. And the contribution it can make is very badly needed.
For individuals, the advice gap has never been so large. Citizen’s Advice reckons 20 million Britons of working age are now unable or unwilling to pay for independent advice on how to manage their money. In areas such as pensions, that is potentially disastrous: we know, for example, that a third of people using income drawdown products have no investment experience, yet two-fifths of these people are not getting any financial advice. Robo-advice has the potential to reduce this gap and that could be crucial.
For financial advisers, meanwhile, the difficulty of reaching out to a millennial investment audience that is highly sceptical about the value they offer – and rarely in a position to pay their fees – now represents an existential threat. For many firms, integrating some sort of robo-advice service into their value proposition could be a way to working with this customer base, building trust and understanding that will in future encourage millennials to become fully-fledged customers.
One thing is certain, however. A mis-selling scandal involving online investment advice – or even a general suspicion that such services are somehow operating outside of the rules – will set back the advance of this technology in financial services by many years or even kill it altogether. That will deny individuals and financial advisers access to an innovation that offers genuinely transformative appeal.
Above all, regulators need to help firms in this space communicate much more clearly about what they are offering. For example, is it advice in the regulatory sense of the word or a discretionary investment management service? Are firms simply supplying digital functionality to more traditional businesses that are regulated in their own right, or offering a standalone service?
All of these operating models are credible and acceptable. The danger lies in customers not knowing which one of them they’re signing up to. Equally, where a robo advice service isn’t transparent on charging – another FCA complaint – it stumbles straight into the quagmire of mistrust that so much of the traditional financial services industry struggles with.
Unless robo advisers are able to address these issues right from the outset, they won’t offer solutions to the deep-seated issues they might otherwise have the potential to counter; worse, they’ll become part of the problem.
The FCA is rightly praised for its openness to invention, with initiatives such as the sandbox enabling entrepreneurs and innovators to develop new ideas out of the glare of full-scale regulation. But when businesses decide it’s time to roll out such ideas to a larger market, it is right that the regulator pays closer attention.
We saw something similar in the peer-to-peer lending market, where the early platforms operated for many years with little scrutiny from regulators. But as these platforms achieved greater scale – and sought benefits such as inclusion in the individual savings account regime – regulatory supervision was increased. That has benefited the peer-to-peer sector’s customers, with scandals seen in other countries so far avoided, and boosted the platforms too, which have greater credibility because of the FCA’s stamp of approval.
The robo advice market is already regulated, so it’s not as if we need a completely new approach from watchdogs. Nevertheless, the FCA’s decision to start taking a much closer look at what different types of robo adviser provide – and to take action against services that are non-compliant – should be welcomed by all. It’s a necessary step on the sector’s journey towards achieving its full potential.