One way that they could do this is by putting in place a 'triage' or filtering process at the start of the transaction, according to draft guidance published by the FCA. This could be used to filter out those clients whose needs would not be met by the firm's particular streamlined offering, or those for whom the service would not be appropriate.
The guidance makes clear that the assessment of suitability is the responsibility of the firm, and that firms should not rely on 'self assessment' by the client. In particular firms should avoid indicating that a particular financial instrument was chosen by the client as being suitable, or requiring the client to confirm that an instrument or service is suitable, according to the guidance.
Firms should monitor who is using their streamlined service on an ongoing basis, and take action if their clients are receiving unsuitable personal recommendations as a result of it, the FCA said.
The guidance is intended to assist firms seeking to develop automated 'robo' advice models within the existing suitability rules, as recommended by last year's Financial Advice Market Review (FAMR). It also tackles FAMR recommendations on fact finds, non-advised services and the ability of employers and trustees to provide information about pensions without straying into regulated advice.
The consultation on the draft closes on 11 July.
FAMR was a joint review by the UK Treasury and FCA, published in March 2016. The review made 28 recommendations designed to improve the accessibility and affordability of financial advice and guidance, in order to tackle the 'advice gap' discouraging consumers with lower budgets and less complex financial needs from seeking full financial advice.
The guidance covers two potential models under which clients may receive streamlined advice: 'simplified' advice, where the firm sets the boundaries of the service it provides; and 'focused' advice, where the client approaches the firm for advice on a specific, limited area of need or a particular product. Both of these models feature a personal recommendation that is limited to one or more of a client's specific needs, and do not involve analysis of other aspects of the client's financial circumstances.
The guidance is intended for use in both face to face and automated streamlined advice models, but is particularly targeted at so-called 'robo' advice. This is a term that arose in the US to describe computer algorithms that offer financial advice. Although non-binding and intended to supplement, rather than replace, the contents of the FCA’s regulatory handbook, the regulator’s intention is that the guidance will allow firms to “deliver suitable person recommendations at a lower cost”, particularly to younger individuals with “relatively simple and focused needs”.
Elsewhere, the FCA has ruled out completely standardising the fact find process in response to the FAMR recommendation that it consider how to make fact finds more ‘portable’. This is because the ‘qualitative’ information required as part of the process, such as the client’s attitude to risk, is generally assessed in “very different ways” by different firms.
“In those areas where the format and content of the fact find are determined by a firm’s internal processes, it is difficult to prescribe a universal fact find without also requiring that firms adopt similar processes, which we consider would be disproportionate to any benefit that might be achieved,” the FCA said.
Of the 28 FAMR recommendations, 10 have now been completed, 11 are ‘on track’ and seven have consultations underway, according to a joint progress report by the FCA and the UK Treasury (15-page / 353KB PDF). The report is the final update that will be produced by the two bodies ahead of 2019, when they will carry out a full review of the outcomes from the work.
Separately, an industry working group set up to build on the work of FAMR has ruled out developing new statutory terms to replace the use of ‘advice’ and ‘guidance’ on the grounds that there was no evidence that changing the terms would improve consumer understanding. However, it urged both regulators and providers to use the terms “actively and consistently”, and back them up with explanations to ensure that clients were fully aware of their meanings.
Financial regulation and enforcement expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com, welcomed the consultation paper, along with the FCA’s “willingness to engage with and support the use of ‘robo advice’ along with other innovations in financial services”.
“The true test is likely to come if robo advice or another innovative solution results in regulatory breaches, and how supportive the FCA is at that stage,” he said.