Financial regulation and technology experts at international law firm Pinsent Masons call for end to ‘advice versus guidance’ debate to avoid hindering innovation in robo advice.
Robo advice tools have the potential to help address the UK’s ‘advice gap’ that was highlighted in the Financial Advice Market Review (FAMR), published in March 2016. The advice gap refers to the number of consumers that need help selecting retail investment products to put their money into, for example saving into a pension or taking out insurance and protection cover, but who cannot afford to pay, or elect not to pay, for regulated financial advice.
Despite initiatives from the Financial Conduct Authority (FCA), including the establishment of a regulatory sandbox scheme to allow businesses to test new ideas outside of the usual regulatory constraints, and a new ‘advice unit’ dedicated to supporting firms looking to develop low-cost, automated advice, there is still a need for greater support and clearer guidance in financial decision-making.
Yvonne Dunn, financial services and technology expert at Pinsent Masons, says:
“These developments are welcome and show that there is both an eagerness in the market to come up with new robo advice solutions and that there is a world-class regulator putting in place the regulatory framework and support systems to encourage their advancement. However, there remains an underlying debate about the way robo advice tools should be treated for regulatory purposes. The debate, and underlying uncertainty, threatens to hamper innovation in the UK.”
There needs to be a shift in the debate from advice versus guidance, and should instead move towards clear information for users of robo advice tools so that they understand the risks of using them and any limitations that the tools have.
FAMR has already reported that some firms have been reluctant to offer guidance services to consumers for fear that they would stray into providing regulated advice. Whether advice constitutes regulated investment advice depends on whether or not it involves product related advice or personal recommendations. The debate looks set to move on since the UK Treasury announced plans to bring the UK’s definition of advice on investments into line with that set out in the EU’s Markets in Financial Instruments Directive (MiFID).
Dunn adds: “While we would hope that a recalibration of the definition will help provide more certainty to developers of robo advice tools, there is a risk that the UK financial services industry will get caught up in the minutiae of regulatory definitions of advice. Given the pace of technological change, adapting the definitions and interpretations of it in regulatory guidelines will not be sufficient to keep up with the developments in the long term.
“Ultimately, clearer information and regulatory standard on robo advice will be more useful for the industry than a discussion on whether what is offered is advice or guidance. Getting that right will ensure robo advice tools win the trusts of consumers and improve take up in helping to select retail investment products. Only then will the UK market mature enough to rival that of the US where there is widespread use of robo advice tools.“