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 earlier this year. The term refers to the number of consumers that need help selecting retail investment products to put their money into but who cannot afford to pay, or elect not to pay, for regulated financial advice.
Figures obtained by Out-Law.com last year showed there was appetite in the UK market for greater regulatory clarity on the use of robo advice solutions. From autumn 2014 up until 19 August 2015, the Financial Conduct Authority (FCA) received 39 requests from companies for assistance on how to implement robo advice systems, technology or services, under its Project Innovate initiative.
Since then the FCA has set up both a regulatory sandbox scheme to allow businesses to "test new ideas without incurring all of the normal regulatory consequences" as well as new 'advice unit' dedicated to supporting firms looking to develop low-cost, automated advice.
Recently the FCA provided an update on these initiatives. It reported that some of the 24 businesses selected to participate in the first iteration of its regulatory sandbox are involved in the advice market. It also announced that nine businesses had been selected to receive support from the new advice unit.
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 development.
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.
FAMR already reported that some firms have been reluctant to offer guidance services to consumers for fear that they would stray into providing regulated advice and could then be potentially liable for doing so without having met all the regulatory requirements.
Whether advice constitutes regulated investment advice depends on whether or not it involves product related advice or personal recommendations.
As my colleague Michael Lewis has previously explained, there is a difference between a generic statement, such as 'buy technology shares', which is not a regulated activity and advice on a particular investment, such as 'buy ABC PLC shares', which is a regulated activity. This is the case whether the advice is express or in writing or through a software programme into which an investor has input data where the system generates advice.
Industry has been agonising for years over the difference between 'advice' and 'guidance' in particularly as financial services has become more digitised and robo advice tools have emerged. Yet the debate looks set to move on further since the UK Treasury recently 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).
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 industry will get bogged down 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 developments in the long term.
The debate needs to move away from a fixation over advice and guidance. This is a point I made at Fintech 2016, a conference which took place recently at Our Dynamic Earth in Edinburgh, where speakers included Bob Ferguson, head of Project Innovate at the Financial Conduct Authority (FCA), Nutmeg co-founder Nick Hungerford, one of the UK’s best-known fintech entrepreneurs, and Graeme Jones, chief executive of Scottish Financial Enterprise.
The regulatory focus should instead shift 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. Ultimately users will find this more useful than a tortuous discussion on whether what is offered is advice or guidance, when the user may not understand the implications of the different categories anyway. It would also make sense for the FCA to seek good consumer outcomes by encouraging firms to ensure the robustness of the algorithms powering robo advice tools and focusing on cybersecurity to ensure that the tools are not vulnerable to hacking.
Getting that right will ensure robo advice tools win the trust of consumers and improve take up of such tools. Only then will the UK market mature to rival that of the US where there is widespread awareness and use of robo advice tools.
Yvonne Dunn is an expert in financial services and technology at Pinsent Masons, the law firm behind Out-Law.com.