I have been reading recently about the 'the Internet of Things', or IoT for short. It is the term being applied to the 'third big wave' of the internet we are apparently undergoing.
You might be wondering what the first two waves were, as I was. The first was apparently the linking up of computers into a global network that allowed them to share packages of information. I am just young enough to have a vague recollection of the black and green screens with text appearing one line at a time and finding this extraordinary. The second wave allowed the linking of documents and the creation of web pages, which has been the mainstay of the internet for the past 20 years.
The third wave, the IoT, involves the internet creeping into more and more places, spreading out its tentacles to connect not just documents and information, but increasingly also to include everyday 'things' which are connected to sensors and the internet. As the cost of sensors and internet connections falls, things connected to the internet will eventually be everywhere. Coffee machines that know you are about to get up in the morning. Fridges that detect that you are running low on eggs and automatically order more (and tell your doctor you are having too many). A watch that detects your vital signs and sends a report to your personal trainer (and warns your insurer of impending heart trouble). A car that detects mechanical problems and automatically books in a service when required (and alerts drivers around you that you are speeding). And all before you even get to work!
The potential for the internet to infiltrate every aspect of our lives and economy is clearly there, whether for better or for worse, or perhaps a bit of both.
This trend naturally creates significant concerns about privacy and security.
Many of us are only barely coming to grips with the amount of information we disclose about ourselves, sometimes inadvertently, when online or using our smartphones. Every page we visit or internet search we do or message we send may to be stored somewhere, linked to all of the other information we disclose, and later analysed to create profiles which allow marketers to send us advertising specifically designed for our vulnerabilities.
Financial services providers are already taking advantage of the possibilities this tide of information is creating, and IoT could allow them to know even more. As with every other aspect of the economy, the increasing infiltration of the internet will prove disruptive as it increasingly displaces the provision of financial services face to face and over the telephone.
While online calculators, 'user interfaces', information and comparison sites, and financial services apps of all kinds have been around for a long time, we are seeing an increasing interest from clients in the development of these tools.
The main impediment is usually a regulatory regime which has not kept up with the pace of technological change.
The first concern is often whether financial product advice is being provided. The concept of financial product advice in Chapter 7 of theCorporations Act 2001 (Cth) requires a 'recommendation' or a 'statement of opinion' which is intended, or which could reasonably be regarded as being intended, to influence a person in making a decision. The distinction may be drawn between advice on the one hand and purely factual information on the other. Whether a particular online tool, calculator, website, or other source of information contains a 'recommendation' or 'statement of opinion', or could reasonably be regarded as doing so, can be a difficult question to answer. However, it is worth careful consideration as often what may appear to be advice at first blush will be found to be lacking a recommendation or statement of opinion on closer analysis. This may be significant especially for providers who are not licensed or authorised to provide advice in relation to certain types of products.
There is then a distinction between general and personal advice. The distinction again is a difficult one and turns on the provider giving advice in circumstances where they have considered one or more of the person's objectives, financial situation and needs (or a where reasonable person might expect that they have done so). In a context where financial services providers are swimming in personal information, it becomes crucial to analyse what 'considered' means, and whether the information which is obtained actually goes towards the client's 'objectives, financial situation and needs'. The obligations on the provider of personal advice are more onerous. My colleagues Michael Mathieson and Rosie Thomas have written in another article in this edition of Unravelled about the limitations placed on the ability of financial services providers to ‘extract value’ from all of the data held by financial services providers by these obligations, and the uncertainties created by ASIC guidance in this area, which at times appears inconsistent.
While the provision of financial information and advice through online means creates risks and uncertainties, it also creates enormous opportunities for both the providers of the advice and consumers. Advice and information can be delivered online at significantly reduced cost (as compared to other means of delivery) to a large number of customers.
While the regulators sometimes express concerns about the online delivery of financial advice and information, I would argue that they should instead see it as a great opportunity to improve compliance within the industry. The online provision of advice allows for much greater transparency and easier monitoring and scrutiny of the advice being provided. The electronic delivery allows for every aspect of the advice process to be recorded and analysed. Providers do not need to rely on advisers or telephone operators to follow scripts or otherwise comply with their obligations. The electronic recording of advice should also allow providers to be able to demonstrate compliance more easily, without having to rely on the vagaries of advisers' memories or note-taking habits.
Given the obvious benefits of the online delivery of advice, there is a clear case for its continued expansion. We hope that the FSI sends a clear message that it is time for the regulatory regime to catch up and to facilitate, rather than create impediments for, innovation in this area. If the predictions about the IoT are true and we will soon find ourselves living in a world where every aspect of our lives can be recorded and analysed by computers, the potential impact of this on the advice we receive, including financial advice, are yet to be worked out. We need regulators and a regulatory regime that see the opportunities implicit in the change, and not only the risks.