New rules aimed at “robo advisers” have been set out by the Treasury and the City watchdog as part of their efforts to make financial advice more widely available.
The guidelines are intended to free online providers from the heavier regulation associated with traditional financial advice, making it easier for them to offer low-cost help for less wealthy investors.
Last year the authorities carried out a review of the financial advice market following concerns over the high cost and accessibility of advice.
The regulator said it wanted to encourage the growth of “ robo-advisers” — websites that suggest investment portfolios to investors based on online questionnaires — as a way to offer investment help to a greater number of people.
As part of its proposals, the FCA suggested developing clearer rules to allow companies to give “streamlined advice”, a form of financial advice for consumers with simple needs.
In its new guidance released today, the watchdog made clear it expected any funds offered to investors by robo-advisers offering “streamlined advice” to be suitable for customers’ risk tolerance and investment objectives.
It also set out examples of information it expected companies to collect about investors, and warned on the importance of forming “clearly worded” risk questionnaires that did not assume “a high level of financial capability”.
In a nod to the digital age, the FCA suggested robo-advisers could pay attention to the design of their websites, suggesting companies use consumer testing and web analytics to monitor how long customers spent on each page.
Traditional regulations typically require independent financial advisers (IFAs) to spend several hours in face-to-face meetings with clients so they can understand the customer’s financial circumstances in detail.
IFAs typically charge £150 an hour, according to unbiased.co.uk, which many consumers regarded as too expensive for their needs. If a client had less than £100,000 to invest, many IFAs do not want to compete for their business.
The proposed shake-up of the financial advice industry comes after the introduction of new rules changing the way advisers are paid.
The regulations — introduced in 2012 — banned asset managers from paying commission to anyone selling their funds. As a result, many advisers stopped offering advice to people with smaller amounts of cash to invest, focusing on wealthier clients who could pay a higher sum for services.
According to the FCA, two-thirds of retail financial products are currently purchased without advice, while many people with less than £100,000 to invest are going it alone when choosing pensions, investments and retirement income products.
While several start-up companies have launched “robo-advice” sites over the past five years, high street banks have recently joined those offering digital advice.
Barclays, Royal Bank of Scotland, Lloyds and Santander UK are developing special online sites to offer investment advice for all their customers.
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