Academic journal article Iowa Law Review

Regulating Robo Advice across the Financial Services Industry

Academic journal article Iowa Law Review

Regulating Robo Advice across the Financial Services Industry

Article excerpt

I. Introduction

The growth of investment robo advisors, web-based insurance exchanges, online credit comparison sites, and automated personal financial management services creates significant opportunities and risks that regulators across the financial services spectrum have yet to systematically assess, let alone address. Because of the scale that automation makes possible, these services have the potential to provide higher quality and more transparent financial advice to more people at lower cost than human financial advisors.1 However, this potential hardly guarantees that it will be realized.

Indeed, the emergence of robo advice does not dispense with the role people play in the industry. People design, model, program, implement, and market these automated advisors, and many automated advisors operate behind the scenes, assisting people who interact with clients and customers. The history of people taking advantage of consumers in the financial services industry is not a pretty one.2 Setting aside fraud and other unsavory activities, the riches to be won by disrupting the financial services industry provide more than enough incentive to rush technology to market. 3 In addition, there are concerns that automation may entrench historical unfairness4 and promote a financial services monoculture with new kinds of unfairness and a greater vulnerability to catastrophic failure than the less coordinated actions of humans working without automated advice.5

The challenges automated advice pose to regulators seeking to preserve the integrity of financial markets do not stop there. There are well-known privacy and security challenges that accompany the digitization of personal financial data,6 and new regulatory challenges that are more specific to automated advice. These include developing the capacities to assess: the algorithms and data incorporated in the automated advisors; choice architecture through which the advice is presented and acted upon; underlying information technology infrastructures; and downside risk from the scale that automation makes possible. Developing these capacities will require financial service authorities-the paradigmatic expert administrative agencies-to invest in new kinds of expertise. Our research and experience suggests that the areas of expertise needed include data science, computer science, behavioral economics, and psychology, to name just a few.7

The benefits to developing these capacities almost certainly exceed the costs because the same returns to scale that make an automated advisor costeffective lead to similar returns to scale in assessing the quality of automated advisors. An expert administrative agency is well situated to realize those returns to scale. Moreover, the potential solvency and systemic risks posed by hundreds of thousands, or even millions, of consumers choosing their financial products based on the same or similar models are sufficiently large and different in kind from those traditionally posed by consumer financial product intermediaries that some regulatory attention is justified on those grounds alone.8

At the same time, however, it is important not to overreact by setting a higher bar for automated advisors than for human advisors. For now, the standard against which automated advisors should be compared is that of humans, whom we know are much less than perfect.9 Although a large body of research in diverse fields demonstrates that even simple algorithms regularly outperform humans in the kinds of tasks that robo advisors perform,10 and, thus, it may be appropriate to hold automated advisors to a super-human standard someday, their market share is too small and regulators have too much to learn to do so today.11

Our goal in this Essay is to open a discussion within legal and financial services scholarship that invites the participation of those with expertise in other relevant disciplines. As automated advisors grow in scale, protecting the integrity of financial markets will require the kind of cross-disciplinary cooperation that regularly occurs in the domains of health and environmental regulation. …

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