The Joint Committee’s paper has broadly captured the relevant characteristics of automated financial advice tools. We are also aware of examples where automation can be partial. There may be some human interaction, for example, to check that input by the customer and output from the tool is correct. In such situations, the level of human input may impact the charge to customer.
HSBC is a vertically integrated financial services provider. One of our businesses currently offers automated financial advice for simple investment products. We expect the number of businesses doing so to increase. The existing and future tools include a decision tree which establishes, amongst other things, risk appetite leading to an appropriate investment. It will include information to help customers select the correct account type and also tools to help identify the contributions and time horizons with reference to financial objectives. We are considering a number of customer journeys where customers can opt to have personal contact (either face to face, virtual advisor, telephone etc) at any stage of their journey. The cost to the customer will be dictated by level of human contact required. Target customers will include “hesitant, hopeful investors” with investment needs. The tool is being developed internally.
The relative novelty of automated financial creates the need to proceed with suitable caution. Accordingly, the issue appears to more one of strategic choice rather than a string of insurmountable barriers. This consultation process has been extremely useful in its discussion of relevant considerations. Primarily, it is imperative that the regulatory treatment of automated financial advice take account of the differing degrees of advice that can be provided: from the sale of an individual product to full financial planning advice.
HSBC agrees with the potential benefits to consumers described in the paper and some additional ones or variations thereof. These include:
- the potential to automate links across banking, insurance and investments in a manner never before possible or experienced. For example, automated tools could monitor income and spending patterns and suggest top-ups to investment plans when appropriate. It could also identify changes in behaviour which could indicate a different risk profile for investment choices or changed or new needs of insurance cover
- the use of data to personalise and enhance the experience of investing or receiving financial education based upon stated or even revealed behavioural preferences
- the paper’s reference to a wider range of consumers having access to advice increases confidence, knowledge and participation in these and other services generally which will materially increase outcomes for both consumers and the financial services industry generally
HSBC considers the benefits arising for consumers in each of the three sectors to be broadly the same.
We are aware of a number of benefits which have accrued (or are likely to):
- an increase in switching to secure the best or better deals
- enhanced consumer capability due to a greater willingness to discuss with others solutions available on the internet such as comparison websites. Anecdotally, levels of consumer discussion and sharing of such matters greatly exceeds a willingness to discuss financial advice that has been provided face to face or personal financial affairs generally.
Automation across all three sectors will benefit institutions as well as consumers. Firms will be able to more accurately target and more appropriately price face to face advice to those who genuinely need it or choose it. As noted above, the anticipated enhanced consumer awareness and understanding is likely to increase demand.
Yes. The paper correctly mentions that many of the risks arising with automated advice are not specific to the digital channel. Accordingly, HSBC suggests that this be one of the main considerations in any regulatory policy response. Most of the risks identified already exist and are being managed. Specifically:
(i) the industry's face to face advice already relies to some extent on “black box” tools (e.g. risk profilers, financial planning simulators or even asset allocation tools) and these are, in many cases, provided to firms by 3rd parties.
(ii) further to the risks highlighted (in 57, 58, 59) on the relationship between advice and pricing, in an environment where the marginal cost of advice is close to zero, one could argue this is less of an issue than in the face to face channel. It also very much depends on the charging structure and, in any case, disclosures of fees are a regulated area with which all firms must comply.
(iii) The risk in 74 (a swift, efficient process leading to unsuitable decisions) needs to be balanced against the risk of inaction due an advisory service perceived as cumbersome, complex and inaccessible.
There is a risk with automated tools that customers engage with a tool that focuses on one part of their finances and then mistakenly believe that they have provided for themselves adequately. Automated advice must also address the issue of whether or not a periodic assessment of suitability will be provided as part of any ongoing service and meet MiFID2 suitability requirements in this regard. The risk of an ongoing advice service failing to adapt to a change in customer’s requirements is not specific to automated advice. However, the medium will need to address this issue. Noteworthy is the fact that an electronic medium is already well equipped to issue periodic information and reminders to customers.
The most appropriate reference point appears to be the recent growth and adoption of online banking in the course of the past two decades.
We foresee the following as possibilities:
(i) Integration of banking and saving / investing functionality / use of data
(ii) Broadening of propositions from stand-alone investment advice to broader financial planning
(iii) Extension from investment advice without a personal recommendation to advice with a personal recommendation
(iv) Increasing use of social media to increase awareness of investments
(v) Increasing use of public information as a tool for automation in customer profiling – e.g. credit risk, insurable risks but also investment related risk profile.
As the paper suggests, automation of advice has the potential to significantly reduce the cost of the provision of advice. The paper also highlights that there are many questions to consider even when considering the automation in a narrow sense (e.g. just investment advice).