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June 4, 2018

UK robo-advice standards must be raised

By Ronan McCaughey

The Financial Conduct Authority’s (FCA’s) recent review of UK robo-advisers revealed serious failings at a number of providers. In a nascent market – where many providers are still seeking to build brand awareness and establish consumer trust – addressing these findings quickly is critical, according to GlobalData Financial Services.

The FCA revealed the results of its review into the UK robo-adviser market. The report, which examined seven online discretionary investment managers and three providers of retail investment advice through automated channels, did not make for positive reading. Examples of failings that were uncovered included unclear service and fee disclosures from the online discretionary firms, inadequate suitability assessments, and weaknesses in identifying vulnerable clients.

The identities of the firms reviewed by the FCA were not revealed, but the impact will resonate across the entire market. The number of robo-advisors has grown in recent years, as providers have sought to fill the advice gap and provide a low-cost investment advice service in the wake of the Retail Distribution Review. The FCA has also encouraged the emergence of automated advice models, creating its Advice Unit following the recommendations of the Financial Advice Market Review published in 2016.

While some high-street banks such as NatWest are now in the robo-advice space, many players are new companies that need to build brand awareness and win the trust of clients. This takes time, and anecdotally many cite client acquisition as a challenge.

For these providers, whether they were included in the review or not the FCA report will not have helped their cause. Indeed, data from GlobalData’s surveying of the market shows that 49% of UK mass affluent consumers will “only buy from companies with a proven track record” and 72% will “only use brands that I believe will be honest with me.”

The FCA has stated it will be reviewing more firms later in 2018. This first report therefore needs to serve as a wake-up call to robo-advice firms to prove they are capable of meeting the same regulatory standards as traditional discretionary and advisory services. They need to get on top of their compliance standards – and fast. One bad report for a nascent industry may be accepted, if not excused. A second poor showing could do lasting damage.

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