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Regulatory response to automated advice tools still under discussion

Regulatory response to automated advice tools

At the end of 2016, International Organization of Securities Commissions (IOSCO) issued a further report on the growing use of automated advice tools. Also, the European Supervisory Authorities (the ESAs) issued a summary report on responses to their Discussion Paper of December 2015 on the increasing phenomenon of automated tools that help consumers take decisions about different types of financial products.

Julie Patterson

Wealth & Asset Management, EMA FS Risk & Regulatory Insight Centre

KPMG in the UK


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In both reports, the term “advice” is not used with the narrow meaning in European regulation but encompasses also “guided sales” and analytical tools. Neither report proposes immediate changes to existing, nor new, guidance or regulation, but both state that these bodies will continue to monitor closely developments in the market place and, by extension, that national regulators should do the same.

IOSCO observes the rapid development in on-line technology tools, which is having an important impact on the investment advice value chain, including asset allocation, portfolio selection and trade execution. The report notes that the majority of national regulators (Canada being a notable exception) have only limited information regarding the number of firms providing such tools, the number of customers or the amounts of assets involved, because in many jurisdictions it is not a regulated activity. However, they have knowledge via those regulated firms that also offer such tools and some regulators (eg Australia) have launched exercises that will capture more information and some are gaining insights via their FinTech units.

There is a range of human intervention in connection with automated advice tools. Often, the tools are used to provide some initial filtering and focussing of the potential investor’s financial circumstances and needs, before directing them to a regulated advice, broking or sales function. The key regulatory concern is that consumers should receive appropriate advice, the same as for the traditional face-to-face advice business model. The use of technology raises the added concern that, if there is an error in the programming or technological process, it may not be picked up without human intervention. Also, consumers may presume that their inputs and the computer must be right without question or double-checking.

Most regulators believe their existing rules are adequate. A number, though, are seeking to clarify the difference between general information, generic advice and personal recommendations, and are requiring regulated firms clearly to disclose the type of service they are offering and its limitations. Some regulators acknowledge that their supervisory techniques must evolve to keep pace with advancing technology.

Within Europe, the ESAs report that the growth of automated advice tools appears to be most prevalent in the securities sector but the phenomenon is not equally widespread across the EU. Respondents to the ESAs’ Discussion Paper concurred with the risks identified but challenged the suggestions that automated tools could provide wider access to advice, facilitate cross border transactions or meet more complex client needs. They also noted that the divergent regulatory definitions of “advice” across the banking, securities and insurance sectors are a barrier to the development of automated advice.

The ESAs conclude that, as the proliferation of automated advice is still at an early stage, it is less likely at the present time for some of the identified risks to materialise in such a way that creates widespread detriment to consumers or undermines confidence. For the time being, therefore, they do not propose to develop additional joint cross-sectoral requirements specific to automated advice tools. They will, however, continue to monitor developments.

Ahead of more specific regulatory requirements being introduced, firms that offer or intend to offer such tools, or that receive business from those that do, might use the risks identified by the ESAs as a checklist and challenge to their design, implementation, monitoring and governance processes.

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