New rules on automated advice for financial service providers

Financial service providers that use automated systems to give advice will be subject to new rules from 1 July 2024. With this long-awaited legal basis, the legislature has created various additional safeguards for responsible use of this 'robo-advice'.

What is automated advice?

Automated advice is a form of advising where the advice is entirely generated by an automated system. Clients' personal requirements and information are digitally analysed, after which the automated system produces the advice and communicates it to the consumer or client. Natural persons may only intervene in this process to provide any support that may be necessary, for example an IT help desk that is called in when the system freezes. 

Aside from fully automated advice, three other forms of advice exist: partly automated advice, hybrid automated advice, and fully face-to-face advice. With partly automated advice, the adviser is available in the background to answer and advise on specific questions; with hybrid advice, the consumer's or client's requirements are analysed digitally but the advice is given by a natural person. With the latter option, the entire advisory process takes place offline, whether or not with the use of digital aids. While all these forms of advice must meet with the normal advice rules, the new rules apply only to fully automated advice.

Automated advice offers many benefits

Advice produced by an automated system offers many benefits, for consumers and clients as well as for financial service providers. First of all, it will improve access to advice. The digital nature enables consumers and clients to obtain advice at a time and place that is most convenient for them. In addition, automated advice will be cheaper for consumers and clients if used frequently. This can be reason for a consumer or client to obtain advice at an earlier stage. Finally, the use of visualisations and other interactive applications can make automated advice easier to understand. For financial service providers, automated advice can also reduce advisory fees, even with the necessary investments. In addition, automated systems can easily process input and automatically load data, increasing the consistency of advice.

Safeguards for responsible use are necessary

Because no adviser is involved, automated advice does pose greater risks than the other forms of advice. For example, the automated system might be fed with inaccurate or incomplete information or might contain an error, or the algorithm could be outdated. If the automated system is not sufficiently tested before being used, these errors can lead to a great deal of incorrect advice being given in a short timespan. This is especially true as there is no adviser involved to check the system's output. The legislature has therefore introduced additional safeguards for automated advice. These safeguards effectively consist of specific product oversight and governance (POG) rules for using this type of system. 

Financial service providers that provide automated advice are required to do the following:

• Designate one or more persons who are responsible for the automated system and the automated advice. The persons responsible must have (i) the expertise necessary to also be able to give the advice directly and (ii) a certain measure of control so their findings on the automated system will actually be heeded;
• Identify a suitable target audience and financial product for automated advice, before implementing the automated system;
• Demonstrate by means of scenario analyses that the automated advice meets the rules in various scenarios;
• Regularly verify that the latest knowledge available is incorporated in the automated system. These checks must be performed by a skilled person;
• Stop using the automated system when an error is detected and inform the consumer or client affected about this error. Other systems must also be checked for this error as soon as possible after its detection. Only when the error has been resolved can the automated system be used again for that type of financial product;
• Set up mechanisms to check whether it is sufficiently clear to consumers and clients what information is being requested and whether they understand the advice, for example by means of targeted questions;
• Draw up procedures and measures to ensure that automated advice meets the same rules as face-to-face advice.

Financial service providers are not required to develop the automated systems themselves but can procure them from another party. In that case, the financial service provider will have to make clear arrangements with the system supplier and set up an internal control process. When buying the automated system, the financial service provider must also understand the rationale, risks and decision rules behind the system's algorithm. The financial service provider will remain the party ultimately responsible for the system's performance and proper compliance with the additional rules that are now being introduced. 

Houthoff has extensive experience with the rules on advice and has close contacts with the industry. We will be pleased to provide you with more information on this scheme.