Financial technology (fintech) is very much alive and kicking in Australia with robo-advice platforms busy trying to fill the gap between full service advice offerings and the provision of generic mass market investment information. Some of these robo products are striking a chord, not only with investors tired of being left in the middle but also with superannuation funds and other financial providers who have recognised the opportunity robo-advice products present for their clients.
This article briefly examines the rise of robo-based advice products in Australia and some of the compliance and risk issues lawyers need to be aware of when advising their clients keen to participate in this space. It provides some guidance on advising on these compliance risks and makes recommendations on assisting clients to plot a course which treads a safe path following the August 2016 release by the Australian Securities and Investments Commission (ASIC) of its Regulatory Guide 255 (RG 255).[i]
Some initial takeaways
For Australian lawyers who are now being called upon to advise their clients on managing the legal risks associated with robo-advice, there are a few tips to bear in mind:
- While no new regulatory requirements are introduced by RG 255, clients seeking to offer robo-advice-based products should expect an additional level of scrutiny from ASIC during the licence application process.
- Given the increased regulatory burdens likely to accompany the provision of “personal” advice-based products, clients will need to carefully consider how to pitch their product. Do they offer “fact”-based products and avoid regulatory oversight or push the boundaries using technology customised for individuals thus triggering more stringent legal obligations?
- Clients can expect further guidance and regulatory oversight as the digital advice industry matures. Clients operating in this space will need to have the flexibility and willingness to adapt to meet any new regulatory requirements as they evolve moving forward.
So what is “robo-advice”?
ASIC, in their 21 March 2016 media release[ii] prior to RG 255, described digital advice (also known as “robo-advice” or “automated advice”) as the provision of automated financial product advice using algorithms and technology and without the direct involvement of a human adviser. It can comprise general or personal advice, and range from advice that is narrow in scope (eg, advice about portfolio construction) to comprehensive financial product advice.
As is often the case with law and technology, the law struggles to keep up with advances in technology. Robo-advice presents a particular challenge. Any technology which allows for a greater user experience tailored to a customer’s specific and unique financial requirements is fraught with risk. We are no longer just dealing with online financial calculators which spit out borrowing limits or the effect of making extra repayments on your mortgage. The latest technology in this space often utilises artificial intelligence and automated machine learning technologies to deliver a richer and more useful recommendation or outcome based on a customer’s unique situation and requirements.
So with that in mind, what are some of the regulatory issues which are likely to apply?
A few threshold issues will assist when dealing with the likely requirements.
First, if the robo-advice is merely providing “factual” advice, then an Australian financial services licence (AFSL) is not required. Typical examples as noted above include online calculators. This sort of advice is not recommending a particular product, investment strategy or course of action. It is merely providing fact-based information which may be useful to the customer. Factual advice is objectively ascertainable information about financial products, the truth or accuracy of which cannot be reasonably questioned.[iii]
ASIC will not treat factual information given by a digital licensee as general or personal advice if:
- the licensee clarifies at the outset that they are giving the customer factual information where there is a reasonable likelihood of doubt; and
- the information is not intended to imply any recommendation or opinion about a financial product.
The next two categories, “general” advice and “personal” advice, are closely aligned and can often be confusing for clients.
The provision of “general advice” will require an AFSL (or at least an exemption). General advice needs to be accompanied by a warning to the customer.
Specifically, if your client is licensed to give general advice, they must warn their customer that:[iv]
- the advice has been prepared without taking into account the customer’s objectives, financial situation or needs;
- the customer should, therefore, consider the appropriateness of the advice, in light of their own objectives, financial situation or needs, before acting on the advice; and
- if the advice relates to the purchase or possible purchase of a particular financial product, the customer should obtain a Product Disclosure Statement (PDS) (if required) relating to the product and consider the PDS before making any decision about whether to acquire the product.
Finally, if the technology allows for the provision of “personal advice”, an AFSL will be required (or at least an exemption) and a statement of advice or SOA will also need to be included for the customer. Advice in this context requires the “advisor” to comply with the “best interests” duty and related obligations under the Future of Financial Advice (FOFA) reforms regime. Personal advice considers the customer’s objectives, financial situation and other needs.
Advice may be regarded as personal advice if it is presented in a way that means a reasonable person might expect the client to have considered one or more of the customer’s objectives, financial situation or needs. It is therefore important clients understand how to properly present the advice and what warnings they include with it.
As such, clients will need to understand within which category their digital advice product is likely to fall. Robo products falling into the “factual” advice category are on safer ground from a regulatory perspective in the sense that they are not subject to the same rigorous oversight that licensees offering general or personal advice-based products are. The flipside for these clients is the sometimes limited nature of the robo-advice product itself.
The opportunity to explore the technology further and make more extensive use of customer information and circumstances may prove too attractive for other clients. These clients will be subject to regulatory scrutiny as their products are more likely to fall within the general and personal advice categories.
Best interests obligation and appropriate advice?
For those clients offering products characterised as personal advice, the challenge can be acute — “How does a computer comply with the best interests obligation?”.
Compliance with the best interests requirements of the client is assessed against a “safe harbour” test which includes a number of elements which need to be considered by the adviser. In an off-line world, these elements are managed by human advisers who have the training, experience and ability to adapt to individual situations. The same cannot necessarily be said of robo-advisers however.
Overcoming technology hurdles
Compliance with the best interests requirements is often not assisted by technology.
The underlying technology providing the advice can only ever develop a set of predetermined results and outcomes for the customer. Even though technology now exists which allows computers to “learn” and to some extent independently verify, we are not there yet when it comes to robo-advisers. As such, any approach which applies a predefined set of outcomes to a customer’s unique personal circumstances may not provide that customer with appropriate advice.
How does a robo-adviser properly satisfy the requirement to obtain complete and accurate information where it was reasonably apparent that information relating to the customer’s relevant circumstances was incomplete or inaccurate? Human advisers sitting down face-to-face with a customer can clarify and confirm customer details, spot any missing information or physically sight that information so it can be properly considered. Digital advice technologies will need to work hard to ensure that any customer information received is accurate and complete at all times but also know when to follow up.
The requirements in s 961B of the Corporations Act 2001 (Cth) were drafted to reflect an off-line advisor world and do not easily lend themselves to digital advice arrangements.
Clients’ intent on offering products which fall within the full rigours of the Corporations Act from a regulatory perspective will need to carefully work through and satisfy these requirements. Does RG 255 offer any further assistance for these clients?
ASIC RG 255 — what does it say?
The RG 255 supplements existing guidelines and does not introduce any new regulatory concepts. It notes that as the law is technology-neutral, the obligations applying to the provision of financial advice in a traditional world are the same as those applying to digital advice.
Reflecting on existing requirements, the Corporations Act sets out various licensing obligations for businesses wishing to provide digital advice. Typically your client will be required to obtain an AFSL, be an authorised representative of an AFSL holder or fall within an exemption. The RG 255 prompts existing licensees wishing to provide digital advice to ensure their current authorisations allow them to extend their offering to digital advice. It also notes that new businesses such as fintech start-ups wishing to provide digital advice to clients will need to obtain their own licence or become an authorised representative of an existing licensee.
Helpfully RG 255 provides guidance on the unique issues which arise for the provision of digital advice. These include the following:
- how the organisational competence obligation in s 912A(1)(e) of the Corporations Act applies to digital advice licensees;
- the ways in which digital advice licensees should monitor and test their algorithms; and
- the minimum steps that digital advice providers should take to comply with the best interests duty in s 961B of the Corporations Act when providing “scaled” advice (personal advice limited in scope) to retail clients.
RG 255 provides guidance on the information your client may be required to provide ASIC as part of its AFSL application. For clients seeking to offer digital advice-based products and services, RG 255 lists a number of other information categories which ASIC may require information about. These include the following:
- the human resources your client will have with the technological knowledge and skills to generally understand the technology and algorithms used to provide the digital advice and to review the digital advice generated by the algorithms;
- when providing “personal” advice, the level of human review that will be undertaken on the advice generated;
- if your client is outsourcing any functions, what measures they will put in place to ensure that due skill and care is taken in choosing suitable providers and the measures your client will put in place to monitor the ongoing performance of these service providers;
- the procedures your client has to monitor and test algorithms;
- the arrangements your client will put in place to comply with its record-keeping obligations;
- the risk management and security arrangements your client will have in place to ensure that its customer information is stored and transmitted securely; and
- how your client will determine whether its professional indemnity insurance cover is adequate.
These are a long list of queries which ASIC may pose to your client during the licence application process. It is important that you make your clients aware of such additional requirements ideally before any application is made to ensure they have considered the likely questions and have put in place measures to address them.
Existing licensees familiar with the licensing requirements under RG 255 may be caught off guard by this and it is therefore important to make sure your more “sophisticated” licensee clients are aware they will be likely subject to additional ASIC scrutiny when embarking on the digital advice option.
Wrap up and final tips
Clients will look to you to assist them to successfully navigate the regulatory challenges posed by digital advice. Your client engagement will likely consider how best to tread this path. You will no doubt need to advise on how best to balance technology innovation with applicable financial regulatory obligations. Clients will look to you throughout their journey as they develop the technology, ensure appropriate licensing is in place and adapt their offering to meet new regulatory requirements as these come through from ASIC.
First published in the Internet Law Bulletin, published by LexisNexis, Australia.
[i] ASIC Providing Digital Financial Product Advice to Retail Clients Regulatory Guide 255 (August 2016) http://download.asic.gov.au/media/3994496/rg255-published-30-august-2016.pdf.
[ii] ASIC “ASIC consults on proposed guidance about ‘robo-advice’” media release (21 March 2016) http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-082mr-asic-consults-on-proposed-guidance-about-robo-advice/.
[iii] ASIC Licensing: Financial Product Advice and Dealing Regulatory Guide 36 (August 2013) at [RG 36.21] http://download.asic.gov.au/media/1238108/rg36-published-20-august-2013.pdf.
[iv] Corporations Act 2001 (Cth), s 949A(2).