Regulator could ban some financial products from being sold on execution-only platforms

In its risk outlook for 2014 (88-page / 2.17MB PDF), the regulator said that it has noticed a "shift" in consumers' behaviour "towards more direct and immediate interaction with products and services" and said there is increasing scope for digital platforms to satisfy consumer demand.

As a result, it said there may come a time in future where it would be appropriate to limit the kind of products that can be sold on 'execution only' platforms because of the need for guidance to accompany the sale of those products and to ensure consumers don't make "ill-informed decisions".

"Growing responsibility for consumers to manage their own finances will be bolstered by technological changes that allow them to manage their own savings and investments," the FCA said. "We need to be aware of the potential gaps in understanding of, or the impact on, consumer decision-making processes that technologies might have. There may be products and services that are unsuitable for execution only purchase."

"It will be important that services providing information and online access to products have oversight and controls in place that prevent consumers from making impulsive or ill-informed decisions, due to more direct, more frequent and faster interaction with financial services, particularly through execution only sales," it said.

Execution-only platforms allow consumers to make investment decisions directly on the platform without the aid of retail investment advice. The FCA has previously identified "significant growth" in the provision of non-advised services by platforms in light of forthcoming changes in regulation of the platforms market.

Increasing use of digital platforms by consumers will speed a reduction in the number of bank branches on the high street, the FCA said, potentially reducing access to services for some members of society that "do not have adequate access to computers".

It further acknowledged that there is a growing blurring of the lines as to whether information displayed by platforms constitutes investment advice or merely "guided self-help" information. Whether information constitutes advice is important as the provision of retail investment advice is subject to strict rules. The FCA said it would look to update its regulatory handbook to "support good business conduct" and ensure that "the controls in place and use of technology supports our objectives and does not drive products out of the market".

The use of technology in the provision of financial services has also "in some cases distracted consumers from important product features or risks", the FCA said. "This may lead them to make rushed or misguided decisions," it added.

However, the regulator also said that there are examples of how technology has helped boost competition and consumer outcomes in the financial services sector.

"In retail advice markets, technology has enabled firms to deliver products and services through effective and cost-efficient distribution channels, which should lead to better value for consumers as these reduced costs are passed on to them," it said. "In wholesale markets, technology improvements are allowing for faster execution, settlement of transactions and portfolio compression – this has increased the number of securities and derivatives transactions that can be carried out."

"By taking on technologies that increase efficiency and respond to changing demands, the competitive dynamics in some markets are changing. New entrants, potentially better able to set up systems that respond directly to consumer requirements, may have a competitive edge on firms that need to integrate technologies with (possibly already overloaded) existing systems."

The FCA also warned of the risk posed by "unregulated entities", such digital currencies and alternative payment platforms. It said that whilst they can help drive competition with traditional, regulated businesses, they "also pose risks to market integrity and consumer protection through technological interfaces with regulated activities".

"These activities may have the potential to create systemic and financial crime risks that would be outside our perimeter," it added.

The FCA also acknowledged the practice of consumer profiling and warned that privacy rights have to be considered when businesses look to gather insights into their customers on the basis of data they collect about them.

The regulator also said that the way systems are "designed and managed" will determine how effective they are. It said there is a risk of IT outages if there is "operational overload" and questioned whether the reliance on existing core systems used by financial services companies "will be adequate to deal with rising demand" from consumers to make use of technology.

"It is important that firms are able to integrate and implement effective oversight and controls for increasingly complex systems," the FCA said. "While technologies can reduce cost and improve efficiencies, there are direct and indirect costs associated with increased use of these new interfaces that also have to be considered. For firms becoming increasingly reliant on technology to deliver their business it could become increasingly difficult to undertake maintenance or fix IT problems while providing a continuous service for consumers."

The FCA also said that the growing cost businesses are incurring in trying to protect their systems against and dealing with cyber attacks could be passed down to consumers.