This article has been produced with Holborn Law, which operates in association with CMS.
On 7 June 2017, the Monetary Authority of Singapore (MAS) issued a consultation paper on the provision of digital advisory services in Singapore. The consultation paper proposes amendments to the Securities and Futures Act and the Financial Advisors Act which are the existing framework governing the provision of financial advice, to allow for the wider use of digital advisors or robo-advisors whilst ensuring that there are adequate safeguards in place. In the consultation, the MAS expressly welcomes the offering of digital advisory services to complement the existing advisory channels as it is of the view that doing so would improve consumers’ access to low-cost investment advice, in effect resulting in a greater democratisation of financial advice. This move by the MAS is evidence of its commitment to strengthening Singapore’s position as a Smart Financial Centre and is a boost to Singapore’s standing as a FinTech hub.What are the key proposals?
The following are the key proposals that the MAS has made to regulate digital advisers:
- Governance and supervision of algorithms. As digital advisers are primarily algorithm-driven, a fault or bias in the algorithms would affect all customers of such digital advisers. Therefore, the methodology of the algorithm needs to be robust to collect and analyse all necessary information. Controls also need to be in place to monitor and test the algorithms to ensure that they perform properly. Proper disclosures to ensure an informed decision on the digital adviser’s services are also necessary. Finally, the digital advisory service’s board and senior management would have the responsibility of ensuring compliance and maintaining effective oversight.
- Suitability of advice. The MAS is prepared to grant case-by-case exemptions to fully-automated digital advice services from the need to collect full information on the financial circumstances of a customer when advising on traditional exchange traded funds. This is because certain digital advisers already seek to eliminate unsuitable customers through the use of “knock-out” questions.
- Portfolio management. For portfolio rebalancing by digital advisers, which occurs at regular intervals, the MAS proposes to dispense with the requirement to obtain the customer’s prior approval for every transaction. Instead, a one-time prior acknowledgment in writing would be sufficient, provided that the customers are notified for every rebalancing transaction and are given the opportunity to object. In addition, the MAS is also prepared to admit digital advisers that do not meet the current requisite five-year corporate track record of managing funds for retail investors, provided certain safeguards are followed.
- Execution of investment transactions. Currently, digital advisers assist customers in the execution of recommended portfolios by passing the trade orders to brokerage firms for execution. However, such activities are currently caught as dealing in securities and such persons have to hold a Capital Markets Service licence unless otherwise exempted. The MAS has received industry feedback that the current licensing exemption is too narrow, and as such has proposed to extend this exemption to any securities beyond collective investment schemes.
Clearly, this consultation paper is indicative of Singapore’s progressive approach towards regulating the ever-changing technological developments in the financial space. For FinTech players, these proposed changes to the existing regulatory framework reduces the barriers to entry and allow them to compete with the more traditional advisory options offered by financial institutions. The consultation closes on 7 July 2017 and we will keep you posted on the outcome of the consultation.