Response to joint Comitteee Discussion Paper on automation in financial advice
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Overall, there needs to be more focus on customer needs assessment when articulating how the rules should be applied, particularly in relation to new processes such as digital guidance and advice tools. It is also important that within the clarity that we are seeking there is a realisation that regulation should not be retrospective so that development and innovation is encouraged. Our understanding is that FCA COBS requirements will be copied across to Guided Advice and this is a particular concern for disclosure requirements as Guided Advice doesn’t lend itself to the requirements. The disclosure requirements need to be adaptable to the method of interaction chosen by the customer.
Additionally, the potential for straying into ‘implied advice’ means that branch staff are restricted in how they can help customers. We believe clarity on how digital guidance and advice tools and processes should work will enable firms to provide the advice that customers need. We believe this is particularly important for banking products where we see a real opportunity to make recommendations about saving and paying down expensive unsecured debt without the need for a full advice process.
To deliver improved clarity we also believe there is merit in reviewing how advice is defined within MiFID and identifying if there is any learning that can be transposed into our current UK legislative framework – particularly the clarity around what constitutes advice and what constitutes information. Specifically we believe that the FCA/HMT should consider aligning the Regulated Activities Order on investment advice with the MiFID definition where advice is when a recommendation is personalised. This would help to simplify the landscape and provide clarity that advice is a personal recommendation with the suitability requirements dependent on the complexity of the product and advice provided. Within this it is important that when a personal recommendation is provided via a digital guided advice solution in branch or over the telephone via a human mediated interaction that the personalised recommendation is provided from the firm and not the individual. This revised approach to how advice is defined would require clear regulatory guidance and importantly revised compliance standards which are balanced depending on the complexity of the solution provided.
A key principal for the successful delivery of a Guided Advice proposition is the ability to transition a customer out of the journey, either to face to face advice or to a different route should the need be identified. The proposition also needs to be wrapped with human support so customers can engaged through branch, webchat and video chat to get help. This will then mitigate the risk that customers will make unsuitable decisions.
With regard to our own proposition, we will be clear that Guided Advice will result in a personal recommendation that has been provided by Nationwide so there is clear liability. We also believe the systematic nature of the Guided Advice tool will create a benefit through easy auditing of the process.
We welcome the opportunity to feed into the work of the European Supervisory Authorities by providing our opinion of how innovation and automated advice can work to provide access to advice for more people. We have recently provided a response to the FCA and UK Government’s Financial Advice Market Review (FAMR) and we outlined our aim that the UK financial services sector supports working people at every stage of their lives.
We firmly believe that having access to advice is a right and not a privilege. For this to be a reality and for financial advice to support customers in the most effective way, we believe that provision of advice must be:
• As straightforward and accessible as possible
• Reasonably priced
• Calibrated according to the advice needs of customers
• Appropriate to the risk associated with the solutions that meet customer needs
Given our mutual ownership and business model, we take a different approach to financial advice than many other providers. We believe that the provision of ‘Help and Advice’ should be for all customers, irrespective of wealth.
To enable the provision of ‘Help and Advice’, support should be provided through digital and human interactions, within a less onerous advice framework that removes lengthy sales processes and allows for execution only interactions. Fitting firmly under ‘Help and Advice’ we believe there should be focused action on helping customers understand that they have needs for financial advice irrespective of life stage or affluence and starting at school through to retirement.
A. Digital Solutions Balancing Technology, Risk, and Human Intervention
i. Digital guided processes are key
To overcome the challenge regarding access to advice, we firmly believe that digital guided offerings can form a robust way of delivering advice to the mass market in an economic manner. This method of delivering advice for straightforward needs across the majority of product sets, including stocks and shares ISAs (individual savings accounts which allow for a certain level of savings per tax year. Returns on these savings are exempt from income tax.), deposit savings, insurances and straightforward mortgages should reduce the risk to both the customer and providers as long as robust due diligence is performed. To enable digital guided advice, clear guidance on how attitude to risk and capacity for loss models could work in a purely digital setting would be very welcome. As part of digital guided advice journeys we feel it is paramount that the process should identify where customers should be stopped from proceeding or need advice on more complex needs. To this end we see digitally guided offerings as a complimentary service alongside our face-to-face advice proposition where we aim to provide solutions to customer needs as we build an ongoing relationship through customers’ life stages. Recently within our investments proposition, we took the decision to move away from model portfolio (circa 15 funds that are chosen to “blend” and match a customer’s attitude to risk) recommendations to a range of risk rated multi asset funds which we expect will be used in circa 90% of all recommendations. This move was based on an aim to improve the simplicity of the product range so that customers don’t have to worry about issues such as portfolio drift, to improve consumer understanding and to ensure that our proposition matches the straightforward needs of our target market. We feel the new multi-asset product range is ideally positioned to fit with our proposed digital guided advice solution. We have also recently simplified our savings range moving towards our aim of a single product solution for each customer need. Our product manufacturing strategy is to offer ‘simple solutions that meet complex needs’. We believe such a move will improve consumer understanding, avoid unnecessary choices and confusion and support focus on advice via digital and human interactions.
We recognise that digital solutions may not be suitable in all circumstances and so it is important that customers can be transitioned to or choose to have human support through methods such as web chat, telephony and face-to-face interactions. We will also ensure that customers can choose to move to or are transferred into a full face to face advice journey should we identify there is a need for them to do so e.g. inheritance tax planning or complex investment need. Similarly, we see the potential for instances where a face to face advice interaction results in the recommendation that the best route for the customer, based on their needs, would be to access the lower cost digital advice that we will provide.
Our retail business strategy is predicated on the benefits delivered through digital guided advice and other digital efficiencies and embedded within it is a focus on ensuring customers receive value for money through our solutions. We see the digital guided advice proposition focused on straightforward needs where, for example, a customer wishes to invest the total amount they can invest into an ISA in a tax year, has limited time, and would be comfortable using the tool online or in branch. Another example may be where a customer has had full face-to-face advice previously but is now comfortable adding to their existing holdings using our digital guided advice proposition – a clear example of our omni-channel model providing easier access to advice that hasn’t been possible previously due to the cost of providing face-to-face advice. We also see benefits for other needs such as protection where a customer wishes to purchase some life insurance and can utilise our optimised digital journey to easily obtain a quote and purchase cover. Our vision is for non-regulated staff to be equipped to help customers through the digital guided advice process where Nationwide and the tool itself are providing the advice, not the member of staff. This will then mean that our face to face advised proposition will be focused in the main on those customers with more complex needs such as large investments, retirement solutions and Inheritance Tax Planning. If a customer wishes to have face-to-face advice then they will be able to access this but it is important that we can highlight whether this is appropriate for their current circumstances. A key element for this operating model to work is the requirement for data persistency, be it initial fact find or attitude to risk answers, where if a customer has gone down one route and transitioned to another there is no need to re-enter information already captured. Similarly, we would like to focus on ways to deliver efficiencies at the suitability stage of the face to face advice process, perhaps exploring suitability letters which can be broken down into modules , again facilitated by digital tools where there is less manual input required by customers and advisers minimising risk, delivering efficiencies and reducing the cost of advice which should ultimately help improve access to advice.
ii. Customer research on guided advice
Our research into digital guided advice, focused on addressing straightforward needs at a lower cost for the mass market, has seen the following conclusions:
1. All customer journeys need to fundamentally include educational elements
2. Trust is key for customers when considering investments
3. A human touch is required to authenticate a customer’s decision and provide reassurance
4. Presentation must be simple and jargon-free whilst maintaining the level of detail and information for customers looking to research in depth
5. Customer’s welcome a good level of questioning and needs assessment as this encourages trust in the recommendation
We have taken these research findings into our strategic plans for utilising digital guided advice as part of our future operating model.
iii. International learning's
We recently sent a senior team to the US to review the significant growth of ‘Robo-Advice’ in the US Investments market. We visited a wide number of businesses from new entrants such as Betterment, Jemstep and Personal Capital to more established players including Charles Schwab, Vanguard and Wells Fargo. One of our key learnings is the need for human support for customers using digital guidance and advice tools and our plans for delivering digital advice will ensure that customers have access to web chat, contact centres and staff in branches to help them navigate the digital tools and processes as well as a referral to full face to face advice if they request it or if our tools determine that their needs require it. We would be happy to share with you our detailed research and findings.
1. Do you agree with the assessment of the characteristics of automated financial advice tools presented in this Discussion Paper? If not, please explain why.
The assessment of the characteristics of automated financial advice tools as presented in the paper is sound and one which we agree with. Key focus for us is the robust assessment of customers’ attitude to risk and capacity for loss alongside the provision of help and support and appropriate means to transition to full face to face advice where required.2. Are there any other relevant characteristics of automated financial advice tools?
Nothing to add3. Are you aware of examples of automated financial advice tools being used in the banking, insurance, and/or securities sectors? Please provide examples, giving details of their operating process.
In the UK the best example is Wealth Horizon which is owned by Aberdeen Asset Management. The process begins with an online fact find to identify key details about the customer before moving onto attitude to risk (ATR) and Capacity for Loss (CFL) questionnaires which provide the customer with an overall risk score. This risk score (high to low, 1-5) then feeds through to the investment recommendation where the recommendation matches the risk score.4. Do you offer/are you considering offering automated financial advice tools as part of your business model? If so, please briefly describe: i) what type of entity you are, e.g., long established, start-up, a product provider, an intermediary; ii) the service you provide (e.g. to what extent do you integrate human interaction in the tool you provide?); iii) the nature of your clients; iv) your business model; v) who developed the automated tool (i.e. an external company or developed internally?); and vi) the size of your activity and/or forecast activity?
We plan to offer an automated financial advice distribution channel as part of our business model to deliver advice to the mass market – those holding less than £50 000. Whilst this will be a fully digital tool, we plan to make it available in branch as well as online and fully believe that human support will be key to the success of this distribution channel. We will enable branch staff to be able to help customers navigate the process with a clear distinction that it is Nationwide and the tool providing the advice not the staff member. For those accessing the tool online we will enable webchat and other help options (e.g. phone) for any queries. In addition, we will ensure that those customers with more complex needs (e.g. inheritance tax or larger investment sums) are moved on to our face advice channel.5. Do you consider there are barriers preventing you from offering/developing automated financial advice tools in the banking, insurance and securities sectors? If so, which barriers?
To deliver digital solutions effectively we need clarity as to how the regulatory rules and frameworks should be applied. This does not mean a fundamental rewrite of the regulatory rule book, rather clarification of how the rules should be applied in different circumstances through the use of published guidance that the industry and the Financial Ombudsman Service (FOS) can use. For example, the recent guidance on retail investment advice (FG15/1) from the FCA was helpful but needed to go further in clarifying the boundaries between information and formal regulated advice. We also believe consumers and the industry would benefit from alignment of rulebooks where possible (e.g. currently our most qualified advisers do not provide advice on savings products, primarily due to the additional T&C requirements that we would have to ensure they adhered to for what are technically our most simple products. There is also uncertainty as to how FCA handbooks COBS/BCOBS would apply to such recommendations).Overall, there needs to be more focus on customer needs assessment when articulating how the rules should be applied, particularly in relation to new processes such as digital guidance and advice tools. It is also important that within the clarity that we are seeking there is a realisation that regulation should not be retrospective so that development and innovation is encouraged. Our understanding is that FCA COBS requirements will be copied across to Guided Advice and this is a particular concern for disclosure requirements as Guided Advice doesn’t lend itself to the requirements. The disclosure requirements need to be adaptable to the method of interaction chosen by the customer.
Additionally, the potential for straying into ‘implied advice’ means that branch staff are restricted in how they can help customers. We believe clarity on how digital guidance and advice tools and processes should work will enable firms to provide the advice that customers need. We believe this is particularly important for banking products where we see a real opportunity to make recommendations about saving and paying down expensive unsecured debt without the need for a full advice process.
To deliver improved clarity we also believe there is merit in reviewing how advice is defined within MiFID and identifying if there is any learning that can be transposed into our current UK legislative framework – particularly the clarity around what constitutes advice and what constitutes information. Specifically we believe that the FCA/HMT should consider aligning the Regulated Activities Order on investment advice with the MiFID definition where advice is when a recommendation is personalised. This would help to simplify the landscape and provide clarity that advice is a personal recommendation with the suitability requirements dependent on the complexity of the product and advice provided. Within this it is important that when a personal recommendation is provided via a digital guided advice solution in branch or over the telephone via a human mediated interaction that the personalised recommendation is provided from the firm and not the individual. This revised approach to how advice is defined would require clear regulatory guidance and importantly revised compliance standards which are balanced depending on the complexity of the solution provided.
6. Do you consider the potential benefits to consumers to be accurately described? If not, please explain why.
Agree with the summary in the main. However we disagree with the benefit of consumers receiving more consistent advice when they use automated tools as the face to face advice provided via our financial planning managers follows a sales process that provides consistency for customers.7. Are you aware of any additional benefits to consumers? If so, please describe them.
We believe the automated advice model (which we call Guided Advice) can be implemented to deliver solutions to other customer needs such as life insurance and income protection where the process can take customers details, assess their needs and provide a recommendation. We see this as a significant way to address the UK’s protection gap by making it easier for customers to understand their needs and make it easier to interact with us to ensure their needs are met.8. Do you see any differences in the potential benefits arising for consumers in each of the banking, insurance and securities sectors?
No – we believe the benefits are product neutral. This is all about ease of access, simplicity and providing great digital journeys to enable the provision of solutions to customer needs,9. Have you observed any of these potential benefits to consumers? If so, please provide examples and describe the kind of benefit that has accrued.
We will be piloting Guided Advice through 16/17 and will assess the success vs. our hypothesis.10. Do you consider the potential benefits to financial institutions to be accurately described? If not, please explain why.
The provision of a Guided Advice proposition is fundamental to providing advice to the mass market, not just the lucky few. We believe this will lead to increased awareness of the benefits of financial advice more widely, will lead to more conversations in branches and more relationships with more customers. This will be a key way of encouraging customers to think about saving in the long term and also considering more of their holistic financial needs including life insurance.11. Are you aware of any additional benefits to financial institutions? If so, please describe them.
As per number 1012. Do you see any differences in the potential benefits arising for financial institutions in each of the banking, insurance and securities sectors?
Nothing to add.13. Have you observed any of these potential benefits to financial institutions? If so, please provide examples and describe the kind of benefit that has accrued.
Nothing to add.14. Do you agree with the description of the potential risks to consumers identified? If not, explain why.
We agree in the main with the risks outlined however, these risks should never materialise as providers should mitigate these before any solutions are launched. For example, our proposition will facilitate an end to end journey and provide clear information as to how the information that is input will feed into the recommendation. Clearly much of the success of the tool relates to the attitude to risk and capacity for loss assessment – if these are robust then the advice will be suitable. If not, then there is the risk of creating a systemic issue.A key principal for the successful delivery of a Guided Advice proposition is the ability to transition a customer out of the journey, either to face to face advice or to a different route should the need be identified. The proposition also needs to be wrapped with human support so customers can engaged through branch, webchat and video chat to get help. This will then mitigate the risk that customers will make unsuitable decisions.
15. Do you consider there to be any risks to consumers missing? If so, please explain.
Nothing to add16. Do you see any differences in the potential risks arising for consumers in each of the banking, insurance and securities sectors?
As above17. Have you observed any of these risks causing detriment to consumers? If so, in what way?
As above.18. Do you agree with the description of the potential risks to financial institutions identified? If not, explain why.
As per the previous section regarding risks to consumers, we agree in the main to the risks identified above however, there should be a focus on mitigation before solutions are launched. As detailed earlier, we see automated tools working alongside human elements through help and support alongside face to face to advice – this is a benefit rather than a risk with more conversations taking place regarding financial advice needs.With regard to our own proposition, we will be clear that Guided Advice will result in a personal recommendation that has been provided by Nationwide so there is clear liability. We also believe the systematic nature of the Guided Advice tool will create a benefit through easy auditing of the process.
19. Do you consider there to be any risks to financial institutions missing? If so, please explain.
Nothing to add20. Do you see any differences in the potential risks arising for financial institutions in each of the banking, insurance and securities sectors?
Nothing to add21. Have you observed any of these risks causing detriment to financial institutions? If so, in what way?
Nothing to add22. Would you agree with the assessment of the potential evolution of automated advice? Please provide your reasoning.
Nothing to add23. How do you think that the market for automation in financial advice will evolve in the near future in the banking, insurance and investment sectors? Please also provide details of any relevant data or information to support your views, where available.
We add the inclusion of data aggregation as an area that will grow alongside automated advice tools where customers will be able to see all of their financial holdings through one portal in line with Payment Services Directive (PSD 2) proposals. A natural extension of this would then to provide automated advice on specific elements of this.24. Are there any other comments you would like to convey on the topic of automation in financial advice?
Nationwide is the UK’s largest building society, with over 15 million customers and around £195 billion of assets. We offer a full range of retail financial services products, from mortgages and savings to credit cards and current accounts. Our history stretches back nearly 170 years and we believe that our proud culture, based on our mutual ownership (we are owned by our customers), is the reason we have the best levels of customer satisfaction among the major high street financial services providers.We welcome the opportunity to feed into the work of the European Supervisory Authorities by providing our opinion of how innovation and automated advice can work to provide access to advice for more people. We have recently provided a response to the FCA and UK Government’s Financial Advice Market Review (FAMR) and we outlined our aim that the UK financial services sector supports working people at every stage of their lives.
We firmly believe that having access to advice is a right and not a privilege. For this to be a reality and for financial advice to support customers in the most effective way, we believe that provision of advice must be:
• As straightforward and accessible as possible
• Reasonably priced
• Calibrated according to the advice needs of customers
• Appropriate to the risk associated with the solutions that meet customer needs
Given our mutual ownership and business model, we take a different approach to financial advice than many other providers. We believe that the provision of ‘Help and Advice’ should be for all customers, irrespective of wealth.
To enable the provision of ‘Help and Advice’, support should be provided through digital and human interactions, within a less onerous advice framework that removes lengthy sales processes and allows for execution only interactions. Fitting firmly under ‘Help and Advice’ we believe there should be focused action on helping customers understand that they have needs for financial advice irrespective of life stage or affluence and starting at school through to retirement.
A. Digital Solutions Balancing Technology, Risk, and Human Intervention
i. Digital guided processes are key
To overcome the challenge regarding access to advice, we firmly believe that digital guided offerings can form a robust way of delivering advice to the mass market in an economic manner. This method of delivering advice for straightforward needs across the majority of product sets, including stocks and shares ISAs (individual savings accounts which allow for a certain level of savings per tax year. Returns on these savings are exempt from income tax.), deposit savings, insurances and straightforward mortgages should reduce the risk to both the customer and providers as long as robust due diligence is performed. To enable digital guided advice, clear guidance on how attitude to risk and capacity for loss models could work in a purely digital setting would be very welcome. As part of digital guided advice journeys we feel it is paramount that the process should identify where customers should be stopped from proceeding or need advice on more complex needs. To this end we see digitally guided offerings as a complimentary service alongside our face-to-face advice proposition where we aim to provide solutions to customer needs as we build an ongoing relationship through customers’ life stages. Recently within our investments proposition, we took the decision to move away from model portfolio (circa 15 funds that are chosen to “blend” and match a customer’s attitude to risk) recommendations to a range of risk rated multi asset funds which we expect will be used in circa 90% of all recommendations. This move was based on an aim to improve the simplicity of the product range so that customers don’t have to worry about issues such as portfolio drift, to improve consumer understanding and to ensure that our proposition matches the straightforward needs of our target market. We feel the new multi-asset product range is ideally positioned to fit with our proposed digital guided advice solution. We have also recently simplified our savings range moving towards our aim of a single product solution for each customer need. Our product manufacturing strategy is to offer ‘simple solutions that meet complex needs’. We believe such a move will improve consumer understanding, avoid unnecessary choices and confusion and support focus on advice via digital and human interactions.
We recognise that digital solutions may not be suitable in all circumstances and so it is important that customers can be transitioned to or choose to have human support through methods such as web chat, telephony and face-to-face interactions. We will also ensure that customers can choose to move to or are transferred into a full face to face advice journey should we identify there is a need for them to do so e.g. inheritance tax planning or complex investment need. Similarly, we see the potential for instances where a face to face advice interaction results in the recommendation that the best route for the customer, based on their needs, would be to access the lower cost digital advice that we will provide.
Our retail business strategy is predicated on the benefits delivered through digital guided advice and other digital efficiencies and embedded within it is a focus on ensuring customers receive value for money through our solutions. We see the digital guided advice proposition focused on straightforward needs where, for example, a customer wishes to invest the total amount they can invest into an ISA in a tax year, has limited time, and would be comfortable using the tool online or in branch. Another example may be where a customer has had full face-to-face advice previously but is now comfortable adding to their existing holdings using our digital guided advice proposition – a clear example of our omni-channel model providing easier access to advice that hasn’t been possible previously due to the cost of providing face-to-face advice. We also see benefits for other needs such as protection where a customer wishes to purchase some life insurance and can utilise our optimised digital journey to easily obtain a quote and purchase cover. Our vision is for non-regulated staff to be equipped to help customers through the digital guided advice process where Nationwide and the tool itself are providing the advice, not the member of staff. This will then mean that our face to face advised proposition will be focused in the main on those customers with more complex needs such as large investments, retirement solutions and Inheritance Tax Planning. If a customer wishes to have face-to-face advice then they will be able to access this but it is important that we can highlight whether this is appropriate for their current circumstances. A key element for this operating model to work is the requirement for data persistency, be it initial fact find or attitude to risk answers, where if a customer has gone down one route and transitioned to another there is no need to re-enter information already captured. Similarly, we would like to focus on ways to deliver efficiencies at the suitability stage of the face to face advice process, perhaps exploring suitability letters which can be broken down into modules , again facilitated by digital tools where there is less manual input required by customers and advisers minimising risk, delivering efficiencies and reducing the cost of advice which should ultimately help improve access to advice.
ii. Customer research on guided advice
Our research into digital guided advice, focused on addressing straightforward needs at a lower cost for the mass market, has seen the following conclusions:
1. All customer journeys need to fundamentally include educational elements
2. Trust is key for customers when considering investments
3. A human touch is required to authenticate a customer’s decision and provide reassurance
4. Presentation must be simple and jargon-free whilst maintaining the level of detail and information for customers looking to research in depth
5. Customer’s welcome a good level of questioning and needs assessment as this encourages trust in the recommendation
We have taken these research findings into our strategic plans for utilising digital guided advice as part of our future operating model.
iii. International learning's
We recently sent a senior team to the US to review the significant growth of ‘Robo-Advice’ in the US Investments market. We visited a wide number of businesses from new entrants such as Betterment, Jemstep and Personal Capital to more established players including Charles Schwab, Vanguard and Wells Fargo. One of our key learnings is the need for human support for customers using digital guidance and advice tools and our plans for delivering digital advice will ensure that customers have access to web chat, contact centres and staff in branches to help them navigate the digital tools and processes as well as a referral to full face to face advice if they request it or if our tools determine that their needs require it. We would be happy to share with you our detailed research and findings.