Insurance and financial intermediaries have embraced the digital revolution and will continue to contribute to it.
BIPAR believes that all channels should be regulated in the same way. Regardless of medium, regulated activities should be held to the same standards in delivering consumer protection. The challenge for the ESAs today is to focus on where boundaries are challenged by new ways of providing insurance and financial advice.
Today the borders between a personal recommendation and information/execution-only are often not very precise and this is not transparent enough for consumers in many cases. This is likely to mislead consumers and to put them at risk. For example in some markets insurance comparison sites come outside the framework or confuse the customers as to what they are doing.
Some Robot advisers" provide a simple, step-by-step process to help consumers to select a product without real advice. Many automated tools do not take into account individual and personal circumstances and therefore can't be described as providing advice. Moreover how will they explain and tell consumers if they are going in the wrong direction? How will they notice that the consumer doesn’t actually understand the question they are being asked and the consequences of any answer. Isn't it something that only human interaction can gauge?
Insurance, investment and pension products require judgement, technical knowledge, qualifications, experience, interpretation and a variety of choice of either products, product options and/ or providers along with standard fact finds, questionnaires and risk profiling tools. This can't be replaced entirely by algorithms.
BIPAR regrets that the scope of the Discussion Paper is quite limited: it does not include automated tools providing information only or general financial analysis, and does not include most comparison websites, calculators, and online banking tools (pages 14 and 15). It also does not include financial education websites or any tools or portals developed by public authorities and consumer protection associations. At the same time however, the paper states that all variants of the phenomenon should be captured, and that the meaning of advice should be seen from the consumer’s point of view, “i.e. the consumer’s understanding of what constitutes advice is broad and not confined to sectoral definitions” (p 10, point 12). As the aim of the ESAs is to “monitor new and existing financial activities and to adopt measures, if any, with a view of promoting the safety and soundness of markets and convergence in regulatory practice” (page 4), shouldn’t the scope of the Discussion Paper be then broadened?
This lack of focus in the ESAs’ paper is a fundamental problem. If you define advice as everything the consumer thinks is advice, the advantages/disadvantages, costs, risks all massively vary depending on what the actual service offered is. There is a massive difference between simple information websites and a personal recommendation."
There seems to be a contradiction in the definition of automated tools' financial advice and in particular regarding the use of the term “advice”. It is stated, on page 10, that the definition used in this Discussion Paper is the following: “Advice is […] an opinion or recommendation as to the appropriate choice of action”. However, it is then stated, on paragraph 20 page 12, that the automated financial advice tools are “consumer-facing tools, as opposed to advisor-facing tools” and are “sometimes referred to as automated advisors, robots or robo-advisors, highlighting their lack of human attributes such as emotional response, bias, judgement, and the ability to assess the need to probe where further clarification or information might be required from the consumer”.
Depending on consumers' risk appetite it may be easy for a Robot adviser to come up with an appropriate asset allocation. However they can’t cope with the open questions – “What should I do with my money?” or “How do I plan for my future?”. Current models are predicated on consumers knowing what they want to do. They don’t help the uninitiated start from scratch. There is a serious risk for such consumers that they will opt for a service that is inappropriate for them.
Very often Robots" claiming that they offer advisory services are specialised in just one product area, and this aspect is not always clearly explained on their websites. There should always be clarity about the limits of the service and what the service is.
Output generated by an automated tool provided on the basis of questionnaires without the possibility for consumers to ask questions, without the possibility for the Robot to assess the need to probe where further clarification or information may be required from the consumer should not be presented as "advice" to consumers. It is not always easy to know how to answer questions accurately or correctly. For example, a consumer may be asked whether "he/she agrees, disagrees, strongly agrees or strongly disagrees with the statement "Others see me as cautious"? Although "agree" and "strongly agree" may sound as though you would take a similar approach to risk, the chosen answer may provide the consumer with a totally different product that may not match his/her real needs.
Of course face-to-face insurance or financial advisers/intermediaries are using such mechanical "risk-based" assessments to decide with the customer / client on an insurance or investment product, but in this case the consumer has always the possibility to ask questions and the intermediary to give clarifications when needed.
BIPAR wants to underline that this is not a binary issue, it is not human or computer. As noted later, most financial advisers or insurance intermediaries will use IT to support their activities and it will make them more efficient.
One additional issue needs to be considered in the case of pure "robo-advice": It is the responsibility for any errors or misjudgement. Does it push the responsibility back on to the consumer (because robo-adviser’s decisions would be based on black and white answers)?"
BIPAR regrets that notwithstanding the confusion about the definition (see our response to question 1), all the following questions seem to focus only on personal recommendations – i.e. delivering advice within the EU regulatory boundaries. In BIPAR's view the risks for consumers come from those not meeting the regulatory standards outside the boundaries with the appearance of offering advice.
There is a difference between the description of the potential benefits and the titles themselves: for instance the description on B2 states that automation in financial advice “might make advice more affordable” while the title states that “consumers pay less” when they use such tools. This might give the wrong impression that a possibility in certain cases under certain circumstances always occurs. The same comment could be made for the other titles and in particular title B5 “consumers receive more consistent advice when they use automated tools”.
Reference could also be made to the studies which lead to such conclusions and their scope. The Forrester study referred to on page 5 on consumer access to digital banking services covers 7 EU countries out of 28 and does not include an analysis of any Central and Eastern European country for instance.
BIPAR is very worried about the consequences of the ESAs’ paper. BIPAR believes that it contains peremptory information, in particular regarding the sale of insurance /financial products via automated tools that are presented as the ideal distribution channel to bring down prices but also barriers to cross border activities and to improve advice. We believe that it is not the role of European supervisory authorities to penalize or to favour one channel in particular.
These benefits are misleading: automated financial advisor tools/ robo-advisor technology is being portrayed as some sort of silver bullet that will draw the masses to financial advice and the cost saving benefits will allow everyone to have a pension or investment portfolio. There is no one size fits all method and it seems this discussion has not highlighted the value of financial advice by human advisors and how important their value proposition is to consumers.
Provider and/or product choice, breadth of coverage, clarity of documentation, solvency and technical competence are all important aspects of financial /insurance advice and intermediation. It is assumed in this consultation paper that they are all equal in the delivery of automated advice. Is there any system that can compare all of these products on the market or their subtle differences and exclusions that can be explained without human advice? Financial/insurance advice is extremely important to consumers and suggesting that using a human advisor may lead to poor advice or human error" as stated on page 17 under paragraph B5 is not acceptable and working on this assumption demonstrates a lack of understanding of the process of an insurance /financial advisor/intermediary and their importance.
1/ Regarding benefits relating to costs of advice, it must be explained here that in most cases "automated advice" is not all-embracing.
Once the risks of the client are identified and the insurance needs are defined, there are a number of factors determining the recommendation that intermediaries make to their clients when advising them on the choice of a particular insurance or insurer. Apart from the price, these factors include, inter alia:
- the breadth of coverage available (capacity),
- the insurer’s flexibility in agreeing coverage,
- the insurer’s image and reputation, especially in respect of claims service (speed, fairness of settlements, additional benefits to claimants),
- the insurer’s financial security,
- the quality and clarity of documentation provided,
- the insurer’s speed in issuing documentation or in quoting terms,
- timeliness in inviting renewal,
- the technical competence of the insurer’s staff,
- the quality and availability of advice provided to policyholders,
- the quality of the other services provided by the insurer, his locational proximity.
This illustrates very well that price is not the only determining factor in the choice of insurance. Too much focus on price is dangerous. In order to have “better” prices, covers are changed, producing “poorer” products with less cover. More digitalisation such as robot advisers or automated advisors without the possibility of a human intervention will not help in this respect.
It is reported in the UK (FCA Risk Outlook 2013) that technological innovations lead to an increased focus on price and that price comparison sites and self-service online models have also been a fundamental driver of consumers’ increased focus on headline price and brand, which potentially distracts them from other crucial product features, such as policy coverage and terms. In Belgium, it is also reported that the focus of new online initiatives is mainly price. The benefits and especially services (like claims handling) are often not fully integrated in the initiatives.
According to the Global Consumer Insurance Survey in France, Germany, Italy, Netherlands, Poland, Spain, Turkey and UK, Ernst &Young, 2012, direct personal contact remains important in Europe during many phases of the product life cycle. This is particularly true when consumers are renewing, extending cover or making a claim. In France, Spain and Turkey, for example, at least 50% of customers prefer personal contact, both at renewal, extending cover and when making a claim.
According to BIPAR, the ESAs assume incorrectly that "automation in financial advice could decrease the costs of providing advice, which might make advice more affordable to a wider range of consumers. Most automated advisers market their offering as a low cost alternative to human advice". If increased competition may result -as one could imagine- in lower prices, the cost of cross-border complaint handling, the cost of investments required for digital development, for distance claims handling... are likely to increase prices.
When a customer gets connected to the internet in order to buy a financial product or service and starts giving information online on his needs and requirements and then suspends the process and eventually finalizes the purchase on his smartphone, at least 5 or 6 entities get involved in the process. One of the involved entities will be responsible for ensuring an efficient connection of data and for hosting the website - unless the hosting is ensured by another entity – while one or more entities will be responsible for the mobile applications and others for securing the processing of the transaction - unless the customer decides to take out the insurance in an agency- , and eventually, another entity will be responsible for securing clients’ data exchanged through the internet as well as securing all the existing mobile applications. And what about the responsibilities of each of these entities in case of malfunction of the tool?
2/ Regarding benefits relating to the range of services, i.e. cross-border transactions, it must be underlined that confidence in making such a cross-border arrangement will only be tested when something goes wrong. Simple, easy-to-understand products, that do not require a considerable outlay, could be considered to lend themselves to cross-border sales. However, one has to bear in mind that even if a product could be labelled “simple” and “fit for cross-border purchasing”, the consumer's situation is not simple. The situation of the consumer is never standardized.
Besides, it is important to stress that "Robot" advisers, like traditional insurance and financial intermediaries will offer their products abroad if the products are capable of being provided cross-border. The fact that this often does not happen today is due to a number of factors such as the taxation regimes, the different legal systems and cultural factors. Standardised digital products will not solve the problems of currently existing barriers to cross-border activities and consumer protection.
BIPAR is not at all convinced by the ESAs stating that « automated financial advice tools make it easier for consumers to access a wider range of advice providers, including from other jurisdictions":
The complexity of the different tax regimes and legal differences in the EU means that cross-border activities are and will be limited, for Robot advisers like for traditional intermediaries. We believe that it is time that the EU shows more confidence in the market. The market will play its role in the protection of consumers, in the development of the single market and in creating competition. Regulation can guide this process but regulation should not force this process. Regulation that forces this process will stifle rather than create competition and cross border activity.
3/ Regarding quality of the service, we do not agree with the wording used. It presents human, non-digital or only partially digital distribution in a very negative way, suggesting distrust with regard to non-digital distribution techniques.
4) Regarding benefits relating to the record of the advisory process, BIPAR does not agree with the description of this potential benefit. "Traditional" insurance and financial advisors are also legally requested (IMD, MIFID) to keep record of their demands and needs test /recommendation."
As described in the background section of this Discussion Paper, the various financial services sectors have differences which must be taken into account and which imply the use of different tools.
Same comment as for question 6: there is a difference between the description of the potential benefits and the titles themselves. This might give the wrong impression that a possibility in certain cases under certain circumstances always occurs. Moreover, none of the potential benefits presented in this chapter seem to be based on studies or surveys. They are simply peremptory statements. This is not acceptable.
The impact of cross-sectorial regulations on automated financial advice tools must also be highlighted. In this respect, paragraphs R6 (“consumers are unaware that the personal data they input in the tools is used in ways they did not envisage when they provided it”) and R9 (“consumers suffer detriment because the automated financial advice tool they use is hacked and the underlying algorithm is manipulated”) must also take into account the upcoming General Data Protection Regulation and more in particular Articles 15 (“Right of access for the data subject”), 16 (“Right for rectification”), 17 (“Right to erasure (right to be forgotten)”), 17a(“Right to restriction of processing”), 17b (“Notification obligation regarding rectification, erasure or restriction”), 19 (“Right to object”), and 31 (“Notification of a personal data breach to the supervisory authority”).
The combination of these rights, rules, and risks with the fact that the consumer is not always fully aware of who is providing him/her advice, as indicated in paragraph R5, could be highlighted.
As mentioned above, we believe that in respect to the potential risks listed by the ESAs, it is of utmost importance that a level playing field is guaranteed between different channels and techniques of distribution, so that the consumer receives the same protection, regardless of where he/she purchases a product. The biggest risk is where consumers think they have had a recommendation but have not (example: execution-only/comparison websites).
The lack of face to face relationship with an adviser may generate, in the consumer’s mind, the feeling that the decision to be taken is more distant and less concrete than it would be otherwise. The fact that this could generate thoughtless decisions could also be highlighted in the Discussion Paper.
Consumers may more easily give a more (too) positive image of their situation when done via an online tool than in a face to face situation.
Each sector is different from each other and this diversity should be reflected in the paper. Furthermore, there could be detrimental consequences for consumers if, for certain products which appear simple, they are excessively encouraged to use automated tools. Health insurance or motor insurance products for instance can appear as simple products but the consequences of an inadequate advice on these products may be particularly detrimental for the consumer. Each insurance product has its own complexity. In its Opinion in the Citroen Case, the European Court states that a car insurance is a complex product.
R14: Errors in the design of automated advice tools used by financial institutions can have massive impact for consumers trying investment advice. If the tools are wrong, consumers get it wrong systematically and it has the potential to be replicated for many or all consumers.
R15: We find it very strange that the following was mentioned on page 28 , paragraph 82:there may be cases where automated advice is offered, but still financial institutions offer alternative means of obtaining advice, e.g. over the phone, with a human advisor, to aid and/or supplement the process. When this is the case, financial institutions may find that consumers tend to use the alternative means of obtaining advice as the principal means, disregarding the role that the automated tool should play in the process of obtaining advice."
BIPAR does not understand the point the ESAs are trying to make regarding this situation. It does not really present a risk for financial institutions. Where is the risk for consumers to overuse the services of the “human” intermediary who is supplementing the automated advice on the product/service?
This shows that if digitalisation can be a very useful tool, at the service of the intermediary and the consumer, the ESAs should absolutely be aware that digital technology is valuable when it allows the client to interact with his intermediary. Digitalisation is an opportunity and its input, its limits, its expected and unexpected implications have to be understood.
R15: Paragraph 82 seems to suggest intermediaries/advisors would play a supporting role to technology and not as its primary source with technology supporting them. This discussion paper seems limited in its scope and has only explored technology/ robo-advisors as a cheaper, more efficient delivery of financial advice rather than the enhancements it could make to the distribution channel of intermediaries/advisors.
Interesting examples of the use of digitalisation can to be found in recent studies (see below) on the web-to-store. They indicate that consumers are willing to use digital means in order to get informed and compare, but finalise their purchase in an agency and in the presence of an advisor. They prove that consumers trust digital means only if they have the possibility to contact an advisor at any stage of the process: during the purchase of the insurance policy, during the life of the product, for claims etc.
1 – Etude Ipsos & Elia Consulting publiée le 13 janvier 2015 : http://fr.slideshare.net/EliaDigitalTeam/le-commerce-hybride-une-etude-elia-consulting-ipsos-janvier-2015-vf
2 - 4ème étude mondiale du cabinet d’audit et de conseil PwC sur le e-commerce menée en 2014 sur 19 pays auprès de 19 000 web-acheteurs :
3- ROPO (Research Online Purchase Offline): stratégie web to store sur Google Adwords
R16: All intermediaries/advisors are required to hold Professional Indemnity Insurance (PII) to cover themselves against potential claims and to also protect the client in the case of bad advice or error EU requirement, but on page 28 of the discussion paper it mentioned third party technology providers for example FinTech’s who would be responsible for correct functioning. If they i.e. FinTech’s are responsible for an issue that results in a loss to clients, who would be liable? How would they be indemnified or what would their solvency be if the provider states they are not liable for the issue? These are grey areas that would need to be clarified."
Technology will continue to play a greater part in the delivery of financial advice and financial services in general. Various business models exist and new ones will appear. From a regulatory perspective digital tools should be considered as supporting tools to intermediaries/advisors and not as a replacement. Therefore the activity based approach should continue and be adopted for regulatory purposes. We believe the statement on page 33, paragraph 91, reflects the reality: consumer awareness of automated financial advice tools seems to be low and financial literacy of consumers has been shown to be limited. Many consumers may prefer to deal with natural persons in order to obtain advice and automated financial advice tools are generally aimed at internet-minded consumers and at consumers who already have an expertise in the financial sector of the product in question. Nevertheless, automated tools might still be used by consumers to seek information on a given market, even if the final decision is made through a human advisor/intermediary.
It is not certain that the emergence of automated advice is always an appropriate answer to consumers’ needs when it comes to insurance and investment products and services. BIPAR is convinced that the human factor will remain an important element in the distribution process, even when distribution is carried out through digital means, and the importance of personalised and adapted advice provided by intermediaries should not be underestimated.
Further thought is required on automated financial advice tools. As things may change quickly in this world we appreciate that supervisors pay attention to digital tools. Presenting (or even implicitly promoting) digital tools as the future of financial advice is however not the role of the supervisor.
Consumers’ financial education is an essential prerequisite to a proper understanding of digitally delivered information related to retail financial products and services