As you will be aware from our previous updates on robo-advice, personalised financial advice in New Zealand must be given by a human being. This is limiting the development of robo-advice models in the New Zealand market and is to be addressed as part of the reforms to the Financial Advisers Act 2008 (FAA). Those amendments are expected to be introduced to Parliament by the end of this month but won’t be effective until 2019.

There is a clear demand, from both industry and the regulator, to allow personalised robo-advice to be provided ahead of the FAA reforms. As a result, the FMA is consulting on an exemption to allow this to happen – the exemption consultation can be found here.

In our view, the proposed exemption is well considered and will allow both existing financial advisers and new entrants to develop and provide personalised robo-advice services covering both investment and insurance products. The FMA is trying to strike a balance between facilitating greater access to advice for consumers and ensuring that suitable safeguards are in place to protect them. To mitigate the risks to consumers, the FMA is proposing that the exemption will be subject to a number of limits and conditions.

The exemption will be subject to conditions but these are very similar to those that regulators have imposed in other jurisdictions (such as Australia) where our offices have been advising on for some time. We don’t expect there to be too much objection to these. They should have been anticipated by those that have already been preparing to provide automated advice.

The exemption will also impose limits on the scope of a robo-adviser service. The exemption won't cover discretionary investment management services (DIMS), although automated DIMS are already possible under the Financial Markets Conduct Act 2013 (FMCA). The service will also be limited to advice on products that are liquid and transferable. The FMA has flagged that it may consider other limits in relation to caps on the amounts of investments under advice for both the client and the provider. These limits will likely attract the most comment and discussion in the consultation.

In summary, the limits and conditions in the proposed exemption are:

Limits:

  • Service: The exemption will be limited to financial advice or investment planning services and won’t cover the provision of DIMS under the FAA or the FMCA.
  • Product type: The robo-adviser will be limited to advice on financial products that are highly liquid or easily transferable. The FMA’s over-riding concern here is that consumers should be able to easily unwind their holdings if the robo-advice is poor or unsuitable. The proposed product list for robo-advice will be:
    • KiwiSaver and managed funds that are continuously offered and redeemed at a price based on the value of the scheme property
    • Listed equities and listed debt
    • Government bonds
    • General insurance products (home, contents and vehicle) and
    • Savings products and credit contracts (other than mortgages).

The FMA may consider including personal insurance products (life, health, income protection) provided that a value cap or duration limit is placed on those products.

The FMA has also flagged that, while it is not planning to impose them at this stage, it may consider the following additional limits:

  • Individual client investment limits: The FMA could consider restricting robo-advice services to those customers with amounts or assets under a certain amount (for example $100,000). The idea here is that those with larger amounts to invest will likely have more complex needs and should seek advice from a human adviser.
  • Limit on total investment amount of products: The FMA may also look to cap the total amount that a robo-advice service can advise on (for example, a limit of $5 million in investments under advice). The goal here is to limit the risk of harm if a robo-advice service fails. The FMA may consider tiered limits depending on the nature of the robo-adviser (for example, QFEs may have a higher limit).

Conditions:

  • Pre-notification procedure: A robo-adviser will need to give prior notice to the FMA setting out ‘good character’ declarations in relation to senior managers and directors and giving details of any criminal convictions in New Zealand or overseas. The FMA will need to issue a no objection confirmation in relation to the good character declarations before the robo-adviser starts business.
  • Status disclosure: The robo-adviser will need to clearly disclose that it is relying on the exemption and that the FMA has not in any way endorsed, approved or reviewed the service.
  • Disclosure: Before giving advice to a client, the robo-adviser will need to give the client sufficient information to make an informed decision, including:
    • The nature and scope of the service and whether the service is limited to a particular range of products. This will need to include:
      • Clarification of the extent of human involvement
      • Clarification that the advice provided will depend solely on the information provided by the client
      • An explanation of any limits on the advice or portfolios generated by the algorithm
      • A concise explanation of the benefits and risks of the service.
    • An explanation of the fees that must be paid.
    • Details of how the robo-adviser is paid and disclosing any actual or potential conflicts of interest that may influence the services provided.
    • An explanation of how complaints can be made.

The FMA expects that many providers will require client confirmation of these disclosures and encourages providers to proactively help clients to understand them.

  • Conduct: The FMA will require providers to consider the conduct obligations in the system design of the robo-advice tool. The conduct obligations are to:
    • Place the client’s interest first. Note that the FMA has made it clear that providers will not need to advise on products outside of their robo-advice service.
    • Take reasonable steps to ensure that the advice is suitable for the client taking into account the nature and scope of the robo-advice service.
    • Not do anything that would be likely to bring the financial advisory industry into disrepute.

Overall, the FMA wants robo-advice to be delivered consistently with the principles in the Code Standards. The consultation includes a comparative table between the exemption conditions and the Code Standards.

  • Capability: The provider must have the appropriate expertise to provide the service. This includes having employees/contractors who understand the technology and the algorithm and employees/contractors who can oversee and review the advice outputs.
  • Filtering processes: The system design will need to include processes to filter out those clients for whom robo-advice is not appropriate. This will require thought as to how the system will weed out unsuitable clients and will involve carefully crafted questions and a process for identifying inconsistent responses.
  • Monitoring and testing: A process will be required to test the quality of the advice outputs and to monitor and test the algorithms.
  • Systems and controls: Adequate risk management procedures and information security systems will need to be in place.
  • Complaints and record-keeping: There will need to be a suitable internal process for resolving any complaints and the provider will need to keep up to date records. The records will need to be available to the FMA on request.
  • Reporting: The provider will need to notify the FMA within 5 business days of any significant matters about the robo-advice service and any matters that may have a negative impact on the FMA’s view of the provider’s good character.

Submissions on the consultation close on 19 July 2017. If you want to discuss your robo-advice offering and how you might be able to make use of the proposed exemption or if you’d like assistance with your submission then please contact one of our experts.