Simplified advice: FSA warns of mis-selling risk of automated systems

The FSA is warning firms developing fully-automated simplified advice processes to be mindful of the possible increased mi-selling risks they pose.

FSA head of investments policy, Peter Smith, said a mistake built into an automatic advice proposition could go unidentified and be replicated across a large number of clients.

In a guidance consultation on simplified advice, published today, the regulator said most of the companies that had expressed a desire to build a simplified advice proposition expected it would be fully automated.

Smith said firms are keen to develop a screen-based process which would include fact-finding tools and a decision tree.

But he warned of the extra risks posed by automatic services.

"If a mistake is built into the system, there is a risk that it could be replicated many times," he said. "It is a concern."

In today's paper, the regulator said the mis-selling risks associated with simplified advice could be greater than those posed by full advice.

Smith said the FSA would not individually 'approve' automated simplified advice propositions as they are developed.

But he said the regulator would use the data it collects as part of its supervisory work to help identify any flaws in firms' systems.

Individuals can also be involved in the delivery of simplified advice. Those who make a 'personal recommendation' must meet the same requirements as individuals who provide full advice.

Meanwhile, Smith reiterated that the FSA does not expect retail investment products to be at the forefront of a simplified advice proposition. Investments should come last, he said.

"The automated systems need to be built in such a way that investments are a final part of the process," he said. "Decision trees need to be sophisticated enough to stop people ending up with a retail investment product when they should not have one."

The concept of simplified advice has been developed to meet the needs of those on low or middle incomes who may not wish - or be able - to pay for full advice.

The FSA believes, for these individuals, paying off debts and meeting other commitments will likely be more pressing than buying an investment product.