Out-Law News 3 min. read

Robo advice a 'phenomenon' that could grow, say EU regulators


The use of automated solutions in the provision of financial advice is a "phenomenon" that "has the potential to continue to grow", according to a committee of EU regulators.

The joint committee of the three European Supervisory Authorities (ESAs), made up of the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA), said, though, that there are risks in using robo advice solutions both for consumers and financial institutions.

In a new discussion paper (35-page / 353KB PDF), the ESAs said they "expect that automation in financial advice will continue to grow in the near future, including a proliferation of more sophisticated tools and an increasing integration of different data sources". However, growth in the development and popularity of such solutions could vary across Europe, it said,

Robo advice solutions can help firms lower costs and deliver more consistent advice to investors, the regulators' paper said.

Risks include that consumers "misinterpret the advice provided to them, and make unsuitable decisions", or place faith in advice based on inaccurate data they have input, it said.

"Automated tools that provide advice to consumers require the input of personal data directly by the consumers," the discussion paper said. "As advice provided via automated tools is reliant on the data inputted without a human sense-checking it, it might be more likely that consumers do not understand how their input is used by the underlying algorithm or decision tree mechanism, or that inaccurate data is provided."

"This could happen because the consumer does not understand what kind of input is requested (e.g. net yearly income may be misinterpreted as gross yearly income); because the consumer is not knowledgeable enough to input the requested data (e.g. a question about what kind of specific financial products a consumer would be willing to purchase may include many technical terms that are unknown to the consumer); or because the tool relies on subjective questions that give rise to misconceptions (e.g. a question about the consumer’s risk profile is totally based on the consumers’ own assessment of his/her risk profile). This risk is greater when advice is provided using an automated tool than advice provided with human interaction, because of a reduced ability to clarify misunderstandings and ask questions," it said.

The paper also identified potential risks to financial firms if the automated advice solutions they develop contain "errors in the design", such as the provision of unsuitable advice and the need to "provide redress for consumers who have suffered detriment".

Firms' use of robo advice solutions developed by third parties, such as financial technology companies, might also pose risks in respect of how liability for problems are allocated, the regulators said.

"Where there are no specific legal agreements between the different actors to stipulate liability on an ongoing basis, and if there are not appropriate controls in place over any outsourcing arrangements, it may happen that financial institutions inappropriately delegate their regulatory and contractual responsibilities to the end provider," the ESAs said in their paper. "Furthermore, if the allocation of liability among all parties involved is unclear, either between the parties, or to the clients, legal disputes may arise between financial institutions and their clients, or between financial institutions and outsource providers."

The discussion paper is open for consultation until 4 March 2016. The regulators said they would review the responses received "to better understand the phenomenon [of robo advice] and to decide which, if any, regulatory and/or supervisory action is required".

David Heffron, expert in financial services regulation at Pinsent Masons, the law firm behind Out-Law.com, said: “The interest of the EU regulators as well as the FCA in robo advice shows the potential impact it is likely to have. Whilst the regulators are clearly interested in the service these automated tools deliver to customers, they are also interested in how this may add to the fragmentation of the financial services landscape. Digitalisation in financial services has the ability to disrupt established distribution chains with customers choosing their preferred supplier for each specific financial need. It’s perhaps not a question of if this will happen, but when.”

Figures obtained by Out-Law.com last month show that there is appetite in the UK market for greater regulatory clarity on the use of robo advice solutions. From autumn 2014 up until 19 August this year, the Financial Conduct Authority received 39 requests from companies for assistance on how to implement robo advice systems, technology or services.

A recent survey of UK wealth managers revealed a split in attitudes to robo advice, with 40% of 70 respondents saying that it offers "the potential for more efficiency and an opportunity to attract new clients to their business in the next five years", while another 40% described it as a "risk to their business".

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