The Monetary Authority of Singapore (MAS) is seeking to regulate the provision of financial advice using digital tools. The new Consultation Paper on Provision of Digital Advisory Services issued on 7 June 2017 (Consultation Paper) sets out broad policy concerns and issues for the regulation of automated, algorithm-based, client facing digital tools that will play the role of financial adviser.
The key areas that the Consultation Paper looks into are as follows:
- The minimum standard of care in developing the client-facing digital advisory tool: The financial adviser should ensure the following:
- The tool collects all necessary information.
- The tool’s algorithms are able to sufficiently analyse the information.
- The algorithms are able to eliminate clients who are unsuitable for investing.
- The tool undergoes sufficient back testing and gap analysis.
- All employees must have the competency and expertise to develop and review the methodology of the algorithms.
- Policies, procedures and controls to monitor and test the algorithms: The financial adviser should ensure that it has proper polices, procedures and controls, including for the following matters:
- Access controls to manage changes to algorithms;
- Controls to suspend the provision of advice if there is an error or bias in the algorithm; and
- Procedures to check the quality of the advice provided by the tool.
- Disclosure of information and conflicts of interest: The MAS is seeking views on the extent of disclosure that should be provided on the algorithm. In addition, it is also proposing that there should be:
- Disclosure of selectivity and limitations of recommendations provided; and
- Disclosure that other investments not considered may have characteristics that are similar or superior to those being analysed.
- Responsibility of the board and senior management: Board and senior management of the financial adviser should be responsible for maintaining effective oversight and governance of the client-facing tools.
The Consultation Paper is also proposing various licensing requirements and exemptions that might be needed. It covers the following:
- It proposes an exemption for fully automated client-facing tools that provide advice on traditional exchange-traded funds from the need to collect all the information required under paragraph 11 of Notice on Recommendations on Investment Products. To provide adequate safeguards for this exemption, there should be a sufficient risk disclosure statement to clients as well as in-tool controls to flag inconsistent responses from the client.
- The licensing exemption for a licenced financial adviser to hold a capital markets services (CMS) licence for fund management should be extended. The current exemption is for the management of unlisted collective investment schemes (CIS) that is incidental to the provision of financial advice. The proposed extension of the exemption will include the management of listed CIS. The exemption will also made available to exempt financial advisers.
- For digital tools that provide portfolio rebalancing, the licensing exemption will apply without the need to get prior approval before each and every rebalancing transaction. This will mean that the tool can automatically transmit the necessary orders to the brokerage firms for execution of the rebalancing strategies. The following, however, will be required:
- There must be a one-time prior disclosure on the details of the rebalancing; and
- Clients must be notified before each and every rebalancing transaction.
- The MAS proposes waiving the five-year track record requirement for a CMS licence in fund management, subject to safeguards.
- Licensed and exempt financial advisers may currently pass on trade orders of recommended portfolios to brokerage firms where these relate to listed and unlisted CIS. The exemption is proposed to be extended to all securities. As a safeguard, the requirement for licensed and exempt financial advisers to assess a client’s knowledge and experience for transacting in specified investment products will be extended to listed specified investment products.