Simplified advice: Pru accuses FSA of u-turn on automated tools

The FSA’s consultation on simplified advice contradicts warnings it has previously made on risk profiling tools and the regulator needs to clarify its position, Prudential distribution strategy director Russell Warwick said.

In a paper published last week, the FSA said the industry could develop fully automated systems as one way for consumers to access simple products using simplified advice.

The FSA has identified simplified advice as a way of making sure the wider public has access to financial guidance.

In a fully automated system, the consumer would "not at any stage in the process have the opportunity of discussion with an employee", the FSA said. The investment advice would be given solely by the system.

Warwick said the FSA's support for this method contradicts its stance on computerised risk profiling tools.

These systems - which input client data to help advisers assess clients' attitude to risk - were identified by the FSA in January as an area of concern it linked with an "unacceptable" level of failure in firms' investment selections.

Adviser firms' over-reliance on risk profiling and asset allocation tools could lead to serious customer detriment, the FSA said at the time.

"The broad conclusion of the FSA's review into risk profiling tools was that the attitude to risk process must be coupled with a structured conversation with an adviser," Warwick said.

"But in the totally-automated simplified option the FSA [outlines], this process alone is OK. We will want a lot more detail on risk mitigation."

However the FSA has fired a warning shot at product providers and other firms who plan to develop automated simplified advice processes.

"Given that the purpose of the system would be to provide advice on investments, we would expect that a fully qualified retail investment adviser would be involved in the design process from the beginning and would need to confirm that the system was fit for purpose before it entered into use," the paper stated.

Prudential favours an alternative option in the FSA paper of an automated system of advice delivered using a computer but with a non-regulated individual to guide a consumer through the process.

"Any simplified system will need to consider three key processes; meeting the compliance requirements; meeting client needs; being commercially viable," Wawrick said.

"A computer based system with a facilitator, who is not influencing advice, is the more commercially viable option, and it has the customer preference element because people don't like just sitting in front of a computer answering loads of questions.

"But it is the option the FSA say they are most concerned about. So we will need to reconcile this," he said.

The FSA is concerned a facilitator not qualified to give advice could stray into advising clients while guiding them through the simplified advice process.

Simplified advice...what stakeholders are saying

Stephen Gay, director-general, AIFA
The idea you can build an algorithm which can provide some guidance to customers is less the problem than the fact you would still have to ask customers to pay for it. I'm not sure somebody is going to get their credit card out and do that.

Carl Melvin, Affluent Financial Planning
Where I have a concern is if somebody telephones in, they are looking for advice, not information. They will look at a decision tree and, faced with options one and two, will ask somebody what to do. But we will not be able to [help].

Philippa Gee, Philippa Gee Wealth Management
In some ways, this is long overdue and there are plenty of people who would like to arrange their finances in that way. As long as this is seen as the easy option for some advisers, it has got to be a good thing.