Regulatory hurdles in automated advice

Regulators are now increasing their oversight and investigation into automated advice platforms as they cross over from simple tools to complex advice and execution platforms. 

An assessment was done on the impact of automated advice by IOSCO in 2014, with the study looking at investor wellbeing and at how regulators globally were dealing with the inherent issues that arise from automated advice platforms.

They found eight major concerns:

  1. The avoidance of regulations by classifying their automated advice tools as non-personal promotional material and recommendations.
  2. Companies not regularly updating customer information that is used for suitability analysis.
  3. Customers not providing enough information for the automated advice tool to give proper or appropriate responses.
  4. Customers choosing unsuitable, risky products based on the advice they received/believing it was actually advice when it wasn’t.
  5. A conflict of interest developing between a company and its customers whereby the company’s tool favours its own company products at the customer’s expense.
  6. Companies lacking sufficient internal controls to supervise the use of automated advice tools.
  7. Companies offering customers sufficient information or disclosure about the tools, including instructions for use and risk disclosure.
  8. Whether companies are using adequate suitability requirements when recommending complex or illiquid products to retail customers.

IOSCO surveyed regulators and intermediaries, with two themes in the guidance sought by intermediaries from regulators.

1. Intermediaries requested that regulators set 'bright lines' on when the use of an automated tool constituted ‘advice’, in contrast to providing an execution-only platform.

2. Intermediaries asked for guidelines on specific policies and procedures that companies should have in place for using automated tools – who can use the tools, what education and training must they have, and what does ‘supervision’ look like.

The call for views on the topic was set around the potential impact of automated financial advice tools on the practice of financial planning and the standards set up to guide planners so they can carry out their duties competently and ethically.

Further guidance has not been released by IOSCO as yet. 

Read about automated advice, where it's headed, and what could happen to the financial advisory arena in future.