In response to the increasing provision of digital financial product advice, also known as ‘robo-advice’, by both start-up Australian financial services (AFS) licensees and existing AFS licensees, ASIC is now consulting on its approach to the regulation of robo-advice in Australia.
Robo-advice involves the provision of computer-generated financial advice that is automated through the use of algorithms and other technology with minimal human involvement. ASIC, recognising the potential benefits to consumers of the growth and development of the market for robo-advice in Australia, has released a Consultation Paper and a draft Regulatory Guide which:
- provides guidance to assist providers of robo-advice to comply with their legal obligations; and
- seeks feedback on how the organisational competence obligation applies to AFS licensees in the robo-advice context; and
- seeks feedback on how AFS licensees should monitor and test the algorithms underpinning robo-advice.
Proposed guidance to assist robo-advice providers
Digital advice and the AFS licensing regime
The draft Regulatory Guide does not introduce any new regulatory concepts (as the law is generally technology neutral) however it provides guidance as to how ASIC will approach the regulation of robo-advice, as distinct from traditional (i.e. non-digital) financial product advice.
The Corporations Act 2001 (Cth) (Corporations Act) requires that if you carry on the business of providing digital advice, you are required to hold an AFS licence, or be an authorised representative of an AFS licensee, unless an exemption applies. In this respect, the draft Regulatory Guide notes:
- existing AFS licensees intending to provide robo-advice will need to consider whether their current licence authorisations enable them to provide digital financial product advice; and
- fintech start-up businesses who want to provide digital financial product advice will need to apply for their own AFS licence or become an authorised representative of a suitably authorised AFS licensee.
As part of the AFS licence application process, ASIC may request additional information about aspects of your business specific to the provision of robo-advice, including:
- Human resources: do you have the technological knowledge and skills to understand the algorithms used to generate the robo-advice and review the advice that is generated?
- Level of human review: if you intend to provide personal advice, what level of human oversight is there of the advice that is generated?
- Risk management: what arrangements do you have in place to monitor and test the algorithms that are used to generate the robo-advice?
ASIC is seeking feedback on the proposed requirements for digital advice licensees to comply with the organisational competence obligation under the Corporations Act.
- In the context of robo-advice, where the financial product advice is generated by algorithms and there is no ‘human advisor’ directly involved in providing the advice, the current standards that apply to the training and competence of advisers are not necessarily applicable.
- ASIC proposes to require that the robo-advice licensee has at least one responsible manager (RM) who meets the current minimum training and competence standards for advisers. To assist AFS licensees to satisfy this requirement, ASIC has proposed a 6 month transition period to enable the licensee to nominate an existing responsible manager and arrange for such person to meet the training and competence standards, or to recruit an additional responsible manager.
We note that the current training and competence standards will change if the Corporations Amendment (Professional Standards of Financial Advisers) Bill 2015 is passed. ASIC does not anticipate that an increase in the current training and competence standards will affect the proposed policy that at least one RM must meet these standards where robo-advice is provided.
Monitoring and testing algorithms
ASIC has proposed a number of requirements for the monitoring and testing of the algorithms underpinning the digital advice to ensure that the quality of financial advice that is generated is maintained. ASIC is seeking feedback on the proposed requirements, and whether AFS licensees consider that more detailed guidance should be provided.
The draft Regulatory Guide states that robo-advice licensees should (among other requirements):
- have appropriate system design documentation that clearly sets out the purpose, scope and design of algorithms;
- have a documented test strategy that explains the scope of testing of algorithms. ASIC expects extensive testing of algorithms to occur before robo-advice is first provided and on an ongoing and regular basis;
- have appropriate processes for managing changes to an algorithm and prevent unauthorised access to the algorithm;
- be able to control, monitor and reconstruct any changes to algorithms over a 7 year timeframe;
- review and update algorithms where there are factors, such as legal or market changes, that may affect the currency of the algorithms; and
- have controls in place to suspend the provision of robo-advice where an error in the algorithm is detected.
In addition, the draft Regulatory Guide indicates that ASIC will expect some level of human review to monitor and test the quality of the robo-advice that is generated and provided to clients.
Comments are due on the consultation paper by 16 May 2016. ASIC expects to release the final Regulatory Guide in August 2016.