Response to joint Comitteee Discussion Paper on automation in financial advice
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We think this fragmentation is a much broader phenomenon. With technology developing the market will be more and more fragmented and the responsibilities of each actor in the chain become more and more difficult to identify. Who is actually in this chain responsible towards the customer and of which part the responsibility falls to each party in the chain? A further complication is that disputes might be handled in different jurisdictions.
Additionally, in a fragmented supply chain it will be more difficult than before to prevent or at least mitigate conflicts of interest. Consumers nowadays often start looking for advice with a search engine like Google. But a search engine might not be impartial. The algorithms might give preference to those who pay to the company behind the search engine in highly nontransparent ways. This means that search engines do not necessarily guide the customer to the sites serving customers’ interests in the best way.
Generally, we do not think the consultation takes seriously enough how differently individuals behave and make choices with automated solutions compared to how they act in personal contacts. There is a need to analyse this applying behaviourial economics etc. For example individuals may quite easily tie themselves to unreasonable terms and conditions through automated services, and people expect it to be easier to change provider in automated services.
An additional component to this is that aggregators often require their providers to give the best quote through the aggregator. This will also change the process.
To our understanding there is empirical evidence that people find it easier to lie to a computer than when talking to another person. This creates more scope for fraud. At least in insurance this is an additional risk to be taken into account.
See also our answer to question 2.
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.
See our answer to question 2.2. Are there any other relevant characteristics of automated financial advice tools?
As an answer to questions 1 and 2, we think the ESA’s might still have a somewhat too narrow scope for what is happening in the marketplace. It is noted briefly in para 90 that: “The ESAs have also taken note of the potential for increasing fragmentation of the distribution chain if automated tools are provided by different specialist firms performing different elements of the process. In this fragmented financial services landscape, the distribution chain may split up in order to allow the consumer to choose the preferred supplier for each specific financial need, advice being one of them”.We think this fragmentation is a much broader phenomenon. With technology developing the market will be more and more fragmented and the responsibilities of each actor in the chain become more and more difficult to identify. Who is actually in this chain responsible towards the customer and of which part the responsibility falls to each party in the chain? A further complication is that disputes might be handled in different jurisdictions.
3. 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.
NA4. 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?
NA5. 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?
NA6. Do you consider the potential benefits to consumers to be accurately described? If not, please explain why.
We think the descriptions in the consultation are very good and they give a good understanding of the benefits to customers.7. Are you aware of any additional benefits to consumers? If so, please describe them.
NA8. Do you see any differences in the potential benefits arising for consumers in each of the banking, insurance and securities sectors?
NA9. Have you observed any of these potential benefits to consumers? If so, please provide examples and describe the kind of benefit that has accrued.
NA10. Do you consider the potential benefits to financial institutions to be accurately described? If not, please explain why.
We think the descriptions in the consultation are very good and they give a good understanding of the benefits to financial institutions.11. Are you aware of any additional benefits to financial institutions? If so, please describe them.
NA12. Do you see any differences in the potential benefits arising for financial institutions in each of the banking, insurance and securities sectors?
NA13. 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.
NA14. Do you agree with the description of the potential risks to consumers identified? If not, explain why.
A component of the fragmentation mentioned in our answer to question 2 is that financial products will increasingly be sold packaged with other products, making it harder to understand what is the main product and what rules apply. It can be difficult for the customer to understand the situation.Additionally, in a fragmented supply chain it will be more difficult than before to prevent or at least mitigate conflicts of interest. Consumers nowadays often start looking for advice with a search engine like Google. But a search engine might not be impartial. The algorithms might give preference to those who pay to the company behind the search engine in highly nontransparent ways. This means that search engines do not necessarily guide the customer to the sites serving customers’ interests in the best way.
Generally, we do not think the consultation takes seriously enough how differently individuals behave and make choices with automated solutions compared to how they act in personal contacts. There is a need to analyse this applying behaviourial economics etc. For example individuals may quite easily tie themselves to unreasonable terms and conditions through automated services, and people expect it to be easier to change provider in automated services.
15. Do you consider there to be any risks to consumers missing? If so, please explain.
See our answer to question 14. Additionally, we feel the situation of so-called vulnerable customers should be taken more seriously.16. Do you see any differences in the potential risks arising for consumers in each of the banking, insurance and securities sectors?
NA17. Have you observed any of these risks causing detriment to consumers? If so, in what way?
See our answer to question 14.18. Do you agree with the description of the potential risks to financial institutions identified? If not, explain why.
See the last paragraph of our answer to question 14 – more frequent provider changes lead to increased lapse risk.19. Do you consider there to be any risks to financial institutions missing? If so, please explain.
In many markets at least some financial products are already nowadays mostly bought through so-called aggregators. These aggregators choose the products with best price for the customer based on information the customer has given. While this increases competition and generally serves the customer, this development also has negative implications. If price becomes the only factor in competition then it is expected that this will influence the process. Often providers need to tailor their products in such a way that their plain vanilla versions do well in aggregator comparisons and lead the customer to their sites where the actual process of trying to create the product for the customer begins.An additional component to this is that aggregators often require their providers to give the best quote through the aggregator. This will also change the process.
To our understanding there is empirical evidence that people find it easier to lie to a computer than when talking to another person. This creates more scope for fraud. At least in insurance this is an additional risk to be taken into account.
20. Do you see any differences in the potential risks arising for financial institutions in each of the banking, insurance and securities sectors?
NA21. Have you observed any of these risks causing detriment to financial institutions? If so, in what way?
NA22. Would you agree with the assessment of the potential evolution of automated advice? Please provide your reasoning.
The long paragraph 88 on lower part of page 31 talks of contracts required to be made in writing. An important technology now emerging (and surprisingly not at all mentioned in the consultation) is the blockchain. There are at least speculations on what this technique might to do to personal insurance here. Basically in the eyes of most enthusiastic blockchain developers that technology will make many of earlier financial institutions obsolete (blockchain achieves trusted contracts between parties who do not know each other without the involvement of a third party like a bank). This should nowadays at least be noted when talking of financial contracts.See also our answer to question 2.