ASIC to regulate financial product advice as the age of disruption accelerates12 April 2016
If you are in insurance, banking, lending, online trading, options, margin lending, non-cash payments or any financial services sector where there are both retail clients and financial advice, then you know that disruptive technology is already here and it is changing the delivery of product advice.
If you are a fintech startup looking to apply disruptive technology to the financial services sector and considering the opportunities available to you, then you probably already know that financial services is highly-regulated and that there is a fine line between when you need an AFS licence and when you don't.
ASIC is now looking at how disruption will apply to existing AFS licensees introducing digital advice, as well as new applicants wanting to carry out a digital advice-based financial services business.
The use of technology to shift the labour intensive and highly-regulated delivery of financial product advice to automated systems is high on the agenda of not only traditional financial service providers but also the fintech startups that, empowered by technology and the agility to adapt quickly, are leveraging their technology to tap into the financial advice market.
On 21 March 2016, ASIC released Consultation Paper 254: Regulating digital financial product advice together with a draft Regulatory Guide (RG 000). The draft guidance is intended to apply to both existing and new AFS licensees who are referred to in RG 000 as "digital advice licensees".
If adopted, the Guide will impose new licence requirements for AFS licensees and introduce obligations on providing digital financial advice to retail customers.
The proposed RG 000 will apply to AFS licensees using automated financial product advice that is generated by algorithms using technology and without the direct involvement of a human adviser, otherwise known as digital advice, robo advice or automated advice.
ASIC, which is tasked with administering a technology neutral law, has been approached over the last two years by both existing AFS licensees and by fintechs seeking clarification on AFS licensing and the regulatory restrictions (if any) on providing digital advice to retail clients.
It has responded by defining robo advice as any form of general or personal advice ranging from narrow-in-scope limited advice to a full portfolio construction based on personal product advice, akin to that provided by a financial planner.
Included in the reforms under consultation are licensing and advice.
All digital advice licensees will require at least one responsible manager who meets the minimum training and competence standards for advisers. ASIC notes:
"we expect digital advice licensees to have at least one person who has an understanding of the technology and algorithms used to provide digital advice. We do not expect all digital advice licensees to understand the specific computer coding of an algorithm—however, we expect your understanding to include having people within the business who understand the rationale, risks and rules behind the algorithms underpinning the digital advice."
Digital advice licensees will be required to ensure the algorithms underpinning the digital advice are properly designed, monitored and tested. ASIC proposes a distinction between the AFS licensee looking to offer digital advice and the outsource service providers building the digital advice platform and algorithm for the digital advice providers. It also expects the licensees to understand the rationale, risks and rules behind the algorithms.
ASIC is proposing additional requirements around risk management, IT and technology, and adequate compensation for both new and existing digital advice licensees.
Issues proposed by ASIC to be addressed by licensed digital advice providers, include addressing cyber risk, the use of cloud technology and the assessment of cyber security using recognised frameworks to mitigate targeted cyber intrusions.
ASIC is proposing digital advice providers use a robust advice triage system to filter out clients for whom the digital advice is not suitable. This robust filtering process will test, at key points in the digital advice process, whether the advice being offered is suitable and in the best interests of the client. If a client seeks advice on an area outside the scope of the advice being offered, the client should be filtered out of the digital advice model.
The consultation period ends on 16 May 2016 and digital advice providers, suppliers and fintech startups should consider the implications of the Guide now and in the future, as it is likely to affect all aspects of business.
To avoid surprises, now is the time to be proactive and look at both the opportunities and the challenges caused by disruption, including how these reforms, if implemented, are going to impact on compliance, regulatory and delivery mechanisms.