By Daniel Lanyon on 1st November 2016
As the market continues to grow for online digital investment, Pinsent Masons says a lack of clear regulation will stifle innovation.
The 'advice vs guidance' debate should be wound-up by cutting regulation to avoid hindering innovation for the nascent robo-advice market, according to law firm Pinsent Masons.
What constitutes ‘advice’ and what constitutes ‘guidance’ is a thorny issue for investment management firms, particularly those without big compliance and legal departments as well as the financial clout to withstand regulatory fines and/or legal bills. For the disruptive part of the investment management market such as robo-advisors, online platforms that manage private investors’ money this presents a particularly pertinent potential future problem.
While robo-advice could, says Pinsent Masons, potentially help address the UK's 'advice gap' that was highlighted in the Financial Advice Market Review (FAMR) published in March 2016, current rules may impede its maturation.
The advice gap refers to the number of consumers that need help selecting retail investment products to put their money into, for example savings or into a pensions or taking out insurance and protection cover. However, they are many investors/consumers of these products that cannot or will not pay advice for them.
The crux of the problem, the FAMR report argues, the definition of advice should be applicable only to where a personal recommendation has been given to an individual. Taking this recommendation on board would in effect make it easier for investment firms to give ‘guidance’ without it coming under regulatory scrutiny.
“Despite initiatives from the Financial Conduct Authority, including the establishment of a regulatory sandbox scheme to allow businesses to test new ideas outside of the usual regulatory constraints, and a new 'advice unit' dedicated to supporting firms looking to develop low-cost, automated advice, there is still a need for greater support and clearer guidance in financial decision-making,” the firm said in a statement.
Yvonne Dunn, a partner at Pinsent Masons specialising in financial services and technology, says that while the FCA’s measures have been a boon for budding robo-advice firms there is also a necessity for more regualtory help.
“There remains an underlying debate about the way robo advice tools should be treated for regulatory purposes. The debate, and underlying uncertainty, threatens to hamper innovation in the UK.”
She calls for a shift in the debate from advice versus guidance, that should instead move towards “clear information for users” of robo-advice tools so that they might better understand the risks of using them and any “limitations that the tools have”.
"While we would hope that a recalibration of the definition will help provide more certainty to developers of robo advice tools, there is a risk that the UK financial services industry will get caught up in the minutiae of regulatory definitions of advice. Given the pace of technological change, adapting the definitions and interpretations of it in regulatory guidelines will not be sufficient to keep up with the developments in the long term.”
"Ultimately, clearer information and regulatory standard on robo advice will be more useful for the industry than a discussion on whether what is offered is advice or guidance. Getting that right will ensure robo advice tools win the trusts of consumers and improve take up in helping to select retail investment products.”
“Only then will the UK market mature enough to rival that of the US where there is widespread use of robo advice tools."