In this fourth Financial Law Insight in our FinTech Series we look at the Financial Markets Authority’s announcement that it will be granting an exemption to facilitate the provision of robo-advice, including:
The exemption will allow personalised robo-advice to be given to retail clients by an entity. In effect, it would treat advice generated by a digital advice tool (either through a website or a mobile app) as advice given by the entity responsible for the tool. Without the exemption, providers would need to wait until the Financial Services Legislation Amendment Bill (‘Bill’) comes into force (currently expected to be in 2019) before providing truly automated advice.
The FMA originally proposed a number of conditions and limits on the exemption as it looked to balance enabling access to personalised robo-advice and promoting innovation against ensuring that appropriate consumer protection safeguards would be in place.
The limits contemplated included:
Reliance on the exemption was proposed to be subject to a requirement that the provider notify the FMA in advance that it intended to rely on the exemption and provide ‘good character’ information. The provider would not be able to rely on the exemption until it received confirmation from the FMA that it had no objections.
What has changed from the original proposals?
The FMA has listened to the industry’s submissions. It has decided not to impose any financial limits on the provision of robo-advice, and has expanded the eligible product list to include mortgages and personal insurance products. We are pleased with these developments, as we saw practical issues with the original proposals (see our earlier Financial Law Insight for details).
The other key change is that the FMA intends to replace the notification process originally proposed with a requirement for providers to receive FMA approval before relying on the exemption. In addition to ‘good character’ information, this will require applicants to provide information showing they have the capability and competence to provide the digital advice service.
Although the FMA makes it clear that this is not a licensing process, the proposals contemplate a qualitative assessment being carried out of each applicant’s capability, competence, and senior management. We understand that the FMA expects the approval process to take one to three months, depending on demand. Combined, these factors suggest that a quasi-licensing process may be applied.
Despite this, the FMA has made it clear that the process will not be a substitute for obtaining a licence under the Bill, and that the full licensing process will still need to be followed once the Bill is in force. As a result, any decision to rely on the exemption will need to take into account the possibility that any digital advice model developed may need to be re-worked on transition to the new regime in 2019.
The FMA has also stated that the conditions of the exemption will be designed to ensure that each robo-advice service is provided in a manner that is consistent with requirements currently applying to authorised financial advisers. This is consistent with the initial proposals, but suggests that the FMA may undertake further work to confirm what this will require in practice.
The FMA will consult further during November 2017 on the details of the application process and the wording of the exemption notice. Ultimately, we expect the FMA to provide guidance, possibly in a similar form to its existing licensing guides, on the process and what applicants will need to demonstrate to receive approval.
The FMA is aiming for the application process to open in early 2018, meaning providers might be able to start to rely on the exemption from the second quarter of 2018.
It is inevitable that digital advice will play an increasing role in the delivery of financial advice, with consumers already able to access offshore platforms. We applaud the FMA for taking a measured approach to the regulation of robo-advice and for responding to submissions received from the industry.
The FMA’s policy announcement represents a key step in the journey towards enabling robo-advice. However, the terms of the exemption notice itself and the specific standards the FMA will apply to the approval process are still to be confirmed. The ability to use systems developed beyond the introduction of the new regime is also uncertain.
No update has been provided on whether providers will need to be relying on the exemption when the Bill comes into force in order to be able to offer robo-advice during the two-year transitional period without a full licence. The initial consultation paper noted that FMA was discussing transitional arrangements with MBIE to facilitate the ongoing provision of robo-advice during the transitional period, without providing any more detail.
As a result, it is hard to gauge just how enthusiastic the industry will be to take up the exemption and how long it will be relevant for. So, the FMA will open the door to robo-advice, but just how wide remains to be seen.
Start a conversation
If you would like a specific briefing on the exemption, what the exemption may mean for your business, or more information about the regulation of financial technologies generally, please contact Catriona Grover on +64 4 498 0816, David Ireland on +64 4 498 0840, Tom McLaughlin on +64 4 498 0886, Karen Mace on +64 4 496 5941, Nick Summerfield on +64 9 915 3357, or email the team at firstname.lastname@example.org.