In a world of big data, machine learning and artificial intelligence (AI), the notion of disclosure and suitability as the bulwarks of investor protection grows ever more quaint and outdated. As technology in the financial services sector grows progressively more powerful, conduct standards must toughen up to match.
Increasingly, tech firms are able to mine the vast quantities of data that are being collected online – largely without the knowledge or explicit consent of clients – for consumer and market insights. Companies that are at the leading edge of AI can use these data to identify and exploit our biases and behavioural shortcomings.
We all leave much more of an online trail than we know or understand. And companies now are able to sift through these data and make judgments about who we are and how we are likely to behave – with surprising precision. In some cases, this enables firms to do good: companies may be better able to identify fraud, to protect clients that might have had their identities compromised and to guard against bad credit risks.
But, just as easily, this information can be exploited – much like a fraudster would – to identify “dumb money” and compile a list of suckers that can be targeted to sell high-priced, high-margin investment products. Although this sort of tactic would certainly be dodgy from an ethical perspective, there’s nothing in the rules to prevent it.
In this environment, disclosure can be as clear and forthright as possible, yet still serve no purpose. When companies can a priori identify investors that are unlikely to read or understand disclosure, regulators’ reliance on disclosure to ensure investor protection is beyond useless. If you think that compliance already is little more than a box-ticking exercise – now the boxes can come pre-ticked.
So, rather than relying on companies to step back from the ethical frontiers that are being created by the increasing power of technology, regulators must step in and establish conduct standards that provide meaningful investor protection. A clear, straightforward “best interest” standard should do the trick.
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