The driving motivation behind using robo-advice is its convenience and its similar results compared to other channels. On the other hand, consumers are deterred from using robo-advice for a variety of reasons. Key concerns rest in not being able to communicate with a human if the need arises. Investors also value the relationship they hold with their human advisors and doubt the level of sophistication behind robo-investing.
Listed below are the key regulatory trends impacting the robo-advice industry, as identified by GlobalData.
Different regulation for different geographies
One problem arising for robo-advisors seeking to expand globally is the lack of a consistent legal definition of ‘advice’ in the three financial sub-sectors (banking, insurance, and wealth). There is also inconsistent application within European member states, both because of different interpretation of the same legislation and different actual legislation. Lack of harmonisation across identification and authentication procedures hampers scalability further.
Suitability of advice is key
An added complexity for robo-advisors is how early-stage robo-advice is and the unknowns around algorithm development and suitability of advice. As things stand, most jurisdictions say that robo-advice must fulfil all requirements of in-person advice. But even if that remains the approach, it is still difficult to operationalise.
Robo-advisors need to use caution when advising customers to purchase specific products and must fully explore the suitability of an insurance product to a customer before recommending it. Failure to do so could lead to another scandal akin to payment protection insurance (PPI) mis-selling that occurred in the UK, causing British banks and financial institutions to pay out $50.03bn in compensation since January 2011.
Absence of regulatory capability
If and when an approach is agreed, regulators need the capability to assess things like the algorithms and data incorporated in automated advisors, the choice architecture through which the advice is presented and acted upon, the underlying IT infrastructure, and the downside risk from the scale that automation makes possible. Developing these capacities will require financial service authorities to invest in new kinds of expertise.
Increased regulatory scrutiny around robo-advisors
In the US, the Securities and Exchange Commission (SEC) has made clear its intention to scrutinise robo-advisors. In December 2018, it brought a case against Betterment for its tax-loss harvesting programme, in which it allegedly made false representations around monitoring accounts for so-called “wash sales” and reposting misleading tweets from partners. Meanwhile, Hedgeable incurred SEC fines for posting misleading factsheets on its website, overstating its returns on various exchange-traded funds. The fines were relatively small – $250,000 for Betterment, $80,000 for Hedgeable – but sent a clear message.
In the UK, the Financial Conduct Authority said it was disappointed with robo-advisors in May 2018, warning that app-based investment companies were failing to properly inform clients about the risks, were not clear on fees, and were failing to fully understand what their customers really wanted to achieve. The Danish Financial Supervisory Authority reprimanded Danske Bank’s robo in June for failing to capture enough information on clients.
General Data Protection Regulation (GDPR) presents an opportunity
While GDPR is, in large, a compliance exercise for companies, it also presents an opportunity for better customer relationship management. GDPR forces providers to document all that is known about a customer, which is often not recorded formally within the wealth space as wealth managers tend to know customers informally.
This creates an opportunity to organise information to answer suitability-of-advice questions. With this information, providers can more accurately match the needs of their clients to the products that are available.
This is an edited extract from the Robo-Advice in Insurance – Thematic Research report produced by GlobalData Thematic Research.