Regulatory uncertainty could hamper retail investment firms' digital maturity, warn experts

Out-Law Analysis | 25 Sep 2014 | 10:00 am | 3 min. read

FOCUS: Digital technology is transforming almost every industry leaving business models, products, and services obsolete as more customer-centric, cost efficient online alternatives take their place. Retail investment businesses are a long way from full digital maturity, but face regulatory uncertainty on their journey towards it.

Online financial advice and adviser–client interactions are areas where digital transformation is accelerating change, helping some businesses achieve their customer convenience objectives. But a lack of clarity over how financial regulation applies to digital innovation is an obstacle to development.

Regulator the Financial Conduct Authority (FCA) has to perform a balancing act between protecting consumers and enabling innovation from which customers will benefit.

In a consultation paper aimed at "clarifying the boundaries and exploring the barriers to market development" of retail investment advice (56-page / 705KB PDF) the FCA has addressed some of these issues. It identifies examples of innovation in providing financial advice that seem to be in a regulatory grey area, such as:

  • pure information portals without any interactivity or classification of products
  • information portals without interactivity that classify products, include industry ‘star ratings’ or tailor-made ratings
  • pop-up boxes that remind customers to consider certain needs such as health, retirement dates or other circumstances when assessing a particular product
  • interactive pages that filter information and products displayed in response to information input by the customer about ‘what they want’ from investment products
  • interactive pages that filter information and display products in response to information input by the customer about ‘what is good for them’
  • combinations of the above.

The FCA did not propose blanket rules outlawing decision trees, filtering questionnaires, best buy lists, star ratings or other forms of classifying products. It did however, draw a distinction between functionality that falls on the side of providing ‘financial advice and personal recommendations' and functionality that does not.

As a guiding principle the FCA has drawn a distinction between presenting information as ‘what customers want’ in terms of investment products and ‘what is good for them’.

In making this distinction the FCA focused attention on three factors:

  • the extent to which information sought about customers relates specifically to their lives and not only their views on effective investment strategies;
  • the extensiveness of information sought, and
  • the complexity of the interactive processes customers are being asked to complete. Information presented as ‘what is good for a particular customer’ falls on the side of providing regulated advice and potentially a personal recommendation.

The FCA’s approach may frustrate some, as it does not set out prescriptive rules against which firms can test innovative propositions. Firms therefore need to continue to make value judgments in assessing compliance risks in presenting information digitally or otherwise engaging with customers digitally. Assessments of this nature are best made at the design and development stage before costs might be wasted on processes that may fall short of the regulator’s expectations.

Planning for digital innovation

When planning for digital innovation in the context of providing financial information or advice to customers, firms will need to measure their innovative proposals against the FCA’s expectations as set out in its current advice guidance consultation.

They should also consider more generally whether to engage with the FCA to identify any other expectations that it may hold in relation to the use of technology and digital channels which could have adverse impacts on their customers or the overall market, whether as part of the consultation on advice or beyond that.

Other digital innovation developments

In addition to its focus on advice, the FCA is also considering more broadly the impact of digital innovation on financial services. As firms consider the retail investment advice guidance consultation, they may also need to:

  • consider whether they would benefit from engaging with the FCA in relation to Project Innovate;
  • review and understand the FCA’s expectations as to meeting the requirements for financial promotions made through social media, and
  • review their overall approach to compliance with ‘digital’ and data laws in general.

John Salmon and Luke Scanlon are technology and financial services experts at Pinsent Masons, the law firm behind Out-Law.com. This article first appeared in a white paper by Pinsent Masons addressing different aspects of the FCA's consultation.

This article first appeared in a white paper by Pinsent Masons addressing different aspects of the FCA's consultation. You can also see our analyses of retail investment advice; 'Project Innovate';  digital technologysocial media and financial advice, the barriers to simplified advicepensions product advicethe FOS as a barrier to innovation, and local authority duties to advise on social care funding.