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Automated investment: the potential for mis-selling

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Automated investment services have been around for a while now. Many people use these services to invest their money, but a recent review by the Financial Conduct Authority (FCA) leaves a big question mark over the industry. In fact, there is potential that automated investment services have been involved in mis-selling.

This is because the FCA report was highly critical of automated investment services, highlighting a number of key areas for concern.

What Are Automated Investment Services?

Automated investment services involve a company making investment decisions on a client's behalf. Clients give permission for this service while also agreeing in general to parameters. However, clients don't choose or approve specific assets or transactions.

Some automated investment services even automate the client relationship. In other words, clients have no interaction whatsoever with real financial advisors.

What Did the FCA Say?

The FCA published its report in May 2018 after investigating a significant proportion of the automated investment service providers currently operating in the UK.

The problems the FCA identified include issues with suitability assessments, service disclosures, vulnerable customers, ongoing client relationships, and overall governance.

In simple terms, the FCA believes automated investment services should operate to the same standards as traditional advisory or discretionary services. However, most automated investment services currently fall well short of these standards.

Below are some examples of the problems and issues with automated investment services that the FCA has concerns about.

Suitability

The FCA said most automated investment services do not properly assess client suitability before signing them up and making investments on their behalf. This means the companies involved did not sufficiently evaluate the investment knowledge, experience, or objectives of potential clients, and they did not analyse the client’s attitude to risk.

In at least one case, clients were asked to assess themselves. Additionally, some automated investment services did not ask clients anything about their investment experience or knowledge.

Misleading Clients or Failing to Disclose Information

The FCA found several problems in relation to giving misleading information or failing to disclose information. This includes automated investment services completing transactions for clients that were different to the transactions they originally recommended.

In addition, the FCA heard claims by automated investment services that they don't give advice even when they clearly offer personal recommendations to clients. Regulators also found issues with providers misleading clients in relation to their fees and how those fees differ from competitors.

Another problem was not telling customers whether the automated investment service was discretionary, non-discretionary, advised, or non-advised.

Governance and Related Issues

Most automated investment services the FCA looked into didn't keep up-to-date information on clients they had an ongoing relationship with.

In addition, the FCA expressed concerns about the procedures automated investment services use to identify and suitably deal with vulnerable clients. In some cases, companies expect clients to identify themselves as vulnerable.

The FCA also found several governance issues in areas like cybersecurity, oversight, and responsibility allocation.

Does This Mean Automated Investment Services Were Involved in Mis-Selling?

While the FCA doesn’t directly accuse automated investment services of mis-selling, the problems it highlighted means there is the considerable potential that mis-selling took place.

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