Introduction

On 30 August 2022, the FCA published Occasional Paper No. 61 ‘Robo-Advice for Borrower Repayment Decisions’.

Concerns about consumer indebtedness and financial distress are growing. Most debt advice services – both free and paid for – are designed to help consumers already in serious financial difficulty. But poor repayment decisions upstream of this – at an earlier stage in the debt lifecycle – may cause consumers serious difficulty later on. This is where automated ‘robo-advice’ comes in. If a consumer is able to set a fixed amount of money to repay debts each month and wants to minimise total interest and fees, there is a clear ‘right answer’ for the order in which they should repay debts, as such, a robo-advice tool could be handled to adapt to handle these cases.

The experiment

The FCA designed and ran an experiment to test the potential for robo-advice to improve debt management decisions, with the aim of answering the following questions:

• How much does robo-advice improve consumers’ debt management decisions?
• Who accepts the tool’s advice and who benefits most? Who rejects the offer to help?
• Do consumers learn from the tool so that their subsequent, unaided decisions are improved? Does this depend on whether or not the tool is bundled with debt repayment tips so that borrowers learn general principles of debt management alongside seeing advice on optimal repayment?

The experiment was ran online, with nearly 3,500 participants representative of the UK population.

Key findings

Key findings from the experiment include:

• Access to free robo-advice significantly improves repayment decisions.
• The average willingness to pay for robo-advice is actually higher than the interest and fees it saves borrowers, suggesting a significant mental cost to making repayment decisions.
• Consumers learn little from using robo-advice, even when provided with explanations. As a result, borrowers are likely to need repeated access to robo-advising tools for decisions to be improved on an ongoing bases.

Occasional papers contribute to the work of the FCA by providing rigorous research results and stimulating debate. While they may not necessarily represent the position of the FCA, they are one source of evidence that the FCA may use while discharging its functions and to inform its views.