Providing digital advice to retail clients

Mar 30 2016

The Australian Securities and Investments Commission (ASIC) has released a draft guide on digital financial product advice for consultation. The draft guide does not introduce new regulatory concepts but clarifies some of the uncertainties that have arisen about how existing obligations will apply to robo-advisers.

Generally, robo-advice is provided using algorithms and without the involvement of a natural person. To ensure that consumers are provided with competent advice ASIC is proposing that at least one manager who is used to demonstrate the organisational competence of the licensee (Responsible Manager) must meet the training and competence standards applicable to natural persons who provide advice to retail clients.

The application of the best interests duty to robo-advisers has created confusion within the industry. The application of best interest duty safe harbour steps explained in Regulatory Guide 244 Giving information, general and scaled advice also applies to robo-advisers as the legislation is technology neutral. However, the draft guide provides additional guidance on how robo-advisers can offer scaled advice. Determining the subject matter, or scale, of advice is a key element of the safe harbour steps.

The draft guide also sets out ASIC’s expectations for licensees in relation to monitoring and testing the algorithms used to generate financial advice including:

system design documentation;
documented testing strategies;
appropriate processes for managing changes to the algorithm;
the ability to control, monitor and reconstruct any changes to algorithms over a seven year period;
processes to review and update algorithms;
controls and processes to suspend the provision of advice if an error is detected;
resources to monitor and supervise the algorithms’ performance; and
robust compliance arrangements to monitor and test the quality of advice provided to clients including human reviews.

Comments on the draft are due 16 May 2016. Find the draft guide and accompanying consultation paper here.