The financial services industry has undergone significant change in the years post the financial crisis of 2008. A raft of new legislation has been introduced and the financial technology (FinTech) industry has boomed creating with it an environment of uncertainty and transformation in the advice sector.
With the FCA announcing that half of the companies in the first wave of its Advice Unit have either launched a low-cost advice service or will be doing so imminently there will soon be plenty to choose from. In a bid to close the gap between those who need advice and those who can afford it, the FCA launched its Financial Advice Market Review (FAMR) to investigate the opportunities and the challenges that automated advice can bring. Here, we discuss what these opportunities and challenges look like and the potential impact this technology will have on the financial services industry as a whole.
Automated advice, commonly referred to as ‘robo-advice’, is the provision of financial advice with as little human interaction as possible. A strand of artificial intelligence, robo-advice offers advice on the basis of mathematical rules and algorithms rather than human intelligence – whilst algorithmic trading may have been around for many years, the concept of a ‘robo-adviser’ has only recently become a reality.
In order to stay current and ahead of this new wave of technology, the FCA introduced Project Innovate in October 2014 in a bid to provide practical support to businesses wanting to introduce innovative financial products. Firms were invited to join the Sandbox where they could test new products without all the usual regulatory requirements. The Advice Unit was subsequently launched in June 2016 in order to provide regulated feedback to those developing robo-advice models, and now also accepts businesses not seeking authorisation but wanting to provide guidance on regulation.
Robo-advice offerings to date have mainly focussed on the less complex end of the financial advice spectrum. However, the FCA’s purported enthusiasm for these advisers has stemmed largely from concerns about an ‘advice gap’, situations where consumers are unable to get/afford advice and guidance. The FCA, much like the FinTech industry, sees a raft of positivity to combat these issues in the rise of robo-advisers, but also some pitfalls. This advice is still very much in its infancy and is generally not yet at the stage where it can provide sophisticated advice in relation to complex circumstances and some external factors seem to be slowing down its fruition.
Ironically, many of the opportunities brought to the table by automated advice also cause the challenges. Opportunities include: a low-cost alternative to traditional services, an increased accessibility for the consumer (on the basis that the advice/ guidance is based on algorithms it can be accessed 24/7), increased access to affordable advice/ guidance, and many argue that it removes human biases and can provide consistent advice/ guidance. The aforementioned opportunities relate to the following challenges: using AI will inevitably lead to job losses and eliminate human interaction, how can one draw the line between advice which is regulated and guidance which is not, this advice brings with it an increased risk if the wrong information is inserted by accident – something a human adviser would be able to spot and correct.
Considering these challenges as part of its Financial Advice Market Review (FAMR), the FCA finalised guidance on ‘streamlined advice and related consolidated guidance’, published in September 2017. Since then, there have indeed been significant strides forwards in relation to further regulation of the financial services industry: the boundary between advice and guidance has been tightened, the Financial Services Compensation Scheme funding review has been launched, employers have been encouraged to facilitate advice for their employees, a dedicated unit for automated services has been set up, and alongside the Treasury and industry experts, the FCA has been working through the latest long list of reforms facing the financial services sector.
Despite these strides and improvements to technology, in particular artificial intelligence, robo-advice appears to only be automating a small part of a much wider industry and at a relatively restricted pace. Like so much in the financial and regulatory technology sectors, it is the collaboration between the technology and the human interaction that makes any AI product a real success. As stated above, the opportunities that automated advice go hand in hand with the challenges and in many cases these will only be ironed out effectively with the human brain working in conjunction with the robot.
About Joe Woodbury:
Joe Woodbury is the director of Investor Management Solutions. He is responsible for new business and ongoing client relations primarily with regulatory lawyers, fund administrators and prime brokers /custodians. He has nine years institutional experience with Bloomberg, is technology-driven, with a deep understanding of financial technologies and focused on the application of fintech in regulation and compliance. He holds a Degree in Economics and has also completed his Investment Management Certificate (IMC) and MSTA (Society of Technical Analysts).