The Financial Markets Authority (FMA) is consulting on a proposed exemption to facilitate personalised robo-advice, which it may grant in late 2017.

Investment product providers and advisers should consider making submissions on the FMA's consultation paper by 19 July 2017.

The Financial Advisers Act 2008 (FAA) requires that personalised financial advice be provided to retail clients by a natural person, effectively prohibiting such advice through robo-advice platforms or digital channels.

Chapman Tripp and others noted in recent submissions on the financial advice reforms that the proposal to remove this restriction, which would not come into effect until 2019,1 would come too late for many providers, who want to deliver personalised robo-advice now.

Chapman Tripp submitted that we would “support a move by the FMA to grant targeted exemptions from existing FAA requirements allowing robo-advice to be provided ahead of the new regime". The FMA should be commended for now pursuing this initiative.

The proposed robo-advice exemption

The FMA's proposed robo-advice class exemption:

  • would be limited to financial advice or investment planning services (i.e. it would not extend to discretionary investment management services)
  • would be limited to advice on products which are easy to exit including highly liquid or readily transferrable products (like KiwiSaver)2
  • may include a client investment limit restricting the service to clients seeking advice on assets for investment under a certain amount (e.g. $100,000)
  • may include a total investment limit restricting the total value of products that a robo-advice service can advise on (e.g. $5 million to reduce the level of harm if a robo-advice service fails), and
  • would provide a two year transition period to the new FAA regime.

Providers using the class exemption may be required to:

  • notify the FMA before relying on the exemption and include a notice that advises users that the provider is relying on the exemption
  • give the client disclosure about the robo-advice service, including on the scope and limitations of its advice, how it uses information, how tailored its advice is, what fees must be paid, what conflicting incentives might exist, and how complaints are made
  • comply with conduct obligations to place the client's interests first, take reasonable steps to ensure the advice is suitable, and not bring the industry into disrepute
  • maintain appropriate capability and expertise
  • establish filtering processes to exclude clients for whom the advice is not suitable
  • conduct regular reviews and monitoring to test the quality of the advice produced, and the underlying algorithms used by the tool
  • have adequate risk management and information security systems, and
  • manage complaints, keep records, and report significant issues to the FMA.

The conditions may be applied proportionately to the size and scale of the service offered.

Practical considerations will dictate whether firms wish to meet these conditions. Robo-advice platforms have high up-front capital costs, require a compelling business case, and must be constantly monitored to ensure the advice provided is accurate, appropriate and adequate.

Several topics in the consultation paper should be considered by anyone making a submission.

Are client investment limits appropriate?

Managed investment schemes may find limits unnecessarily restrictive, difficult to implement, or easily circumvented. This is particularly so for KiwiSaver, where the advice gap is most acute, and where sums invested are likely to exceed the proposed $100,000 ceiling, especially over time.

Is a total investment amount limit appropriate?

A $5 million total investment limit – which, to our knowledge, exists nowhere else in the world – may be difficult to track and may be unnecessarily restrictive. Larger providers may quickly meet this limit, limiting their clients' access to robo-advice.

Should disclosure be prescribed or flexible?

A prescribed form of disclosure ensures key warnings can be conveyed efficiently. However, prescribed statements may need tailoring where they would otherwise be inaccurate or misleading. More descriptive content such as risk descriptions require flexibility to cover different circumstances.

Should other eligible products be included?

Overseas regimes such as Australia do not, to our knowledge, restrict the types of products that robo-advice platforms can advise on.

Overseas practice

Overseas jurisdictions have developed, or are developing, guidance on robo-advice which submitters may wish to consider:

  • Australia has permitted robo-advice for several years. The Australia Securities and Investments Commission (ASIC) released Guidance in August 2016 on digital advice. The FMA's consultation paper contains elements that are found in Chapter D of the ASIC Guidance on 'Providing scaled advice in the best interests of the client'.
  • The United Kingdom has a well-developed robo-advice market. The Financial Conduct Authority has operated a Digital Advice Unit since June 2016 that works with firms developing robo-advice platforms.
  • Singapore permits robo-advice platforms through technology neutral regulation. The Monetary Authority of Singapore released a consultation paper on governance and supervision of Digital Advisory Services in June 2017.
  • Hong Kong has one of the most sophisticated markets for robo-advice platforms. The Hong Kong Securities and Futures Commission released a consultation paper on proposed guidelines on Online Distribution and Advisory Platforms in May 2017.
  • The United States has permitted robo-advice platforms since 2005 and has the largest robo-advice market globally. FINRA released a report on Digital Investment Advice in March 2016 that illustrates the growth of these platforms.
  • Europe permits the provision of robo-advice. The Joint Committee of European Supervisory Authorities released its report on Automation in Financial Advice in December 2016 and regulates such platforms through several EU Directives.

The FMA's proposed class exemption will ensure that New Zealand's regulations align with those that are being developed in other jurisdictions.

If you would like information on offering robo-advice in New Zealand, or wish to discuss making a submission (due 19 July 2017), please contact any of the lawyers featured.

Chapman Tripp is the only law firm in New Zealand that has submitted at every stage of the Financial Advisers Act reform process.

MBIE Feb 2017 Consultation

Date
MBIE Consultation Document on the New Financial Advice Regime 17 Feb 2017
MBIE Fact Sheet on the New Financial Advice Regime 17 Feb 2017
MBIE Exposure Draft of the Financial Services Legislation Amendment Bill 17 Feb 2017
Chapman Tripp
Submissions on the Financial Advice Regime Exposure Draft 30 April 2017
Client Alert on new Financial Advisers and Service Providers Regime 17 Feb 2017
Brief Counsel on FinTech Regulation in Australia – Lessons for New Zealand? 4 Oct 2016
Brief Counsel on the new direction for the Financial Advisers' Regime 15 July 2016
Brief Counsel on the FMA's noted issue of churn in the life insurance industry 1 July 2016
Brief Counsel on the Reserve Bank's view of digital disruption in banking 27 June 2016
Submission on the Review of the FAA Reform Options 26 Feb 2016
Submission on the Review of the FSPA Reform Options 26 Jan 2016
Submission on the Review of the FAA and FSPA Reforms

13 Oct 2015