ASIC Drafts Robo-Advisory Guidelines

New ASIC regulatory guide and draft proposals on robo-advisor guidelines.

Following an increase in the number of firms offering robo-advice to clients, the Australian Securities and Investment Commission (ASIC) today released a regulatory guide and consultation on proposed guidance about robo-advice for both its regulated firms and companies seeking regulation with ASIC to offer automated investment advice to clients. 

For background, advisors typically recommended investments to clients based on their personal financial circumstances and investment goals, and such investments combine to form a new portfolio or go into the client’s existing portfolio of investment holdings. Robo-advisors aim to do the same thing via a computer program that removes the human advisor from the equation.

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Robo-advisory services aim to identify the common suitability points and investment objectives that human managers would otherwise identify from clients such as during a call or interview, and instead robo-advisors offer similar investment advice based on a pre-defined range of products that meet client profile criteria based on information provided by the client through the application (such as after filling out a list of multiple choice questions).

A recent survey conducted by US-based securities broker E*TRADE showed how the human touch is still needed in robo-advisory offerings.  For a number of firms, the competition has been fee-based, citing how robo-advisors can help lower the amount of advisory fees paid by clients, in comparison to traditional human advisory fee models.

Robo-Advisor FinTech Trend

This approach has become popular in recent years as firms seek to onboard clients faster, and as startup companies have come up with new ways to compete, fueled by FinTech initiatives. Also today, speaking at a press conference at Parliament House in Canberra, Treasurer Scott Morrison spoke about new FinTech reforms underway and mentioned the new robo-advisor rules that the government is planning on implementing.

Commenting in the regulator’s official press release, ASIC Commissioner John Price said: “ASIC is keen to see a healthy and vibrant digital advice sector. We see digital advice as having the potential to offer Australian consumers access to good quality, low-cost, financial advice.”

Mr. Price added: “ASIC is committed to helping industry take advantage of the opportunities offered by Robo advice while ensuring that investors and financial consumer trust and confidence is not compromised. We encourage industry and other stakeholders to take part in this consultation process.”

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Feedback by May 16th

ASIC is seeking feedback by May 16th on several matters that it identified as unique to robo-advisors and digital advice and included two regulatory guides attached to its press release dated today.

Three three main points from the accompanying documents included how ASIC is proposing to release a guide named “Providing digital financial product advice to retail clients” as well as a requirement for firms to have an appropriate manager that overlooks the offering who meets certain competence standards for advisors applicable for licensees as required under the Corporations Act. And, how licensees should monitor and test their algorithms that underpin the digital advice being provided.

Responsibility for Outsourcing

The regulator added that even firms that outsource the technology to a 3rd party provider need to understand the rules, rationale and risks behind how the algorithm chooses investment advice to offer clients, even if the source code of the algorithm isn’t accessible for them to review or if it’s hard to understand, as firms that outsource the robo-advisory functions still remain responsible for the financial services provided to clients.

In one of the accompanying documents dated March 21st, ASIC described several scenarios to differentiate between digital advice where a provider would be giving general advice and not require a license from ASIC and other examples that would require registration such as when advice is personalized.

Six Months for Manager

A long list of items was also included in the update of what firms will be required to do with regard to offering robo-advisory services.

For example, ASIC added that firms need to be able to filter out clients for whom the advice being offered is not suitable, or who want advice on a topic outside the scope of advice being offered, such as when a client selects a particular level of investment experience, among other items that could require the firm to provide certain advice or withhold it.

The regulator also announced that under section RG 000.51 it is giving AFS licensees a transition period of six months from today to comply with the requirement to have at least one responsible manager who meets the training and competence standards.

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