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ROBO-ADVICE – HOW TO APPLY FOR, AND COMPLY WITH, THE FMA’S NEW EXEMPTION
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After an extensive consultation process, the FMA has now opened applications for providers to rely on its exemption for providers of robo-advice (also referred to as digital advice).

A number of changes have been made to the initial drafts of the exemption documents, many of which significantly improve the workability of the exemption and provide certainty to providers looking to rely on the exemption.

At our panel sessions in early March, representatives from the FMA and Kensington Swan discussed the exemption terms, the application process (including the detail the FMA is seeking), and practical guidance on how to get underway and comply. Here are the key takeaways.

In brief:

In this sixth Financial Law Insight in our FinTech Series we look at the final form of the Financial Markets Authority’s exemption to facilitate the provision of robo-advice, including:

  • what providers will need to do, both at the initial application stage and on an ongoing basis, to rely on the exemption
  • key points from our recent panel sessions with representatives from the FMA, including how much detail to go into
  • some practical tips for preparing an application and ensuring ongoing compliance. 

Quick recap

The exemption allows personalised robo-advice to be given to retail clients by an entity. It treats financial advice generated by a digital advice facility (either through a website or a mobile app) as advice given by the entity responsible for the facility. Without the exemption, providers would need to wait until the Financial Services Legislation Amendment Bill (‘FSLAB’) comes into force before providing truly automated personalised advice.

The release of the draft exemption documents follows two rounds of consultation during 2017, with the second inviting comments on the FMA’s draft exemption document pack (you can find our earlier Insights on the earlier stages of the process here).

In order to rely on the exemption, a provider will need to apply to the FMA, and once that application has been approved, wait for the exemption notice to be updated to specifically name the provider. Providers relying on the exemption are then subject to ongoing disclosure, conduct, and competency obligations.

How to apply to rely on the exemption

The final document pack released contains the exemption notice, as well as an information sheet, application form, ‘good character’ declaration, application guide, and submissions report.

Each of these documents outlines information that the FMA needs to be given before allowing a provider to rely on the exemption. The guide contains a number of minimum standards that providers must meet, which cover five key areas: good character, capability, risk management, IT systems, and client filtering.

The submissions report provides an insight into the FMA’s thinking in relation to the terms of the exemption, and its responses to key submission themes.

Key takeaways

At our panel sessions, the FMA provided a number of insights into what providers should be able to show, and how they should approach the process.

Key points from the panel sessions include:

  • The intention is to ensure that everyone providing personalised advice to retail clients is subject to the same standards of competency, conduct, and capability – regardless of whether the advice is provided by a natural person or an entity. This is reflected in the terms of the exemption, which aim to subject exempt providers to the same standards as authorised financial advisers (‘AFAs’).
  • Although the application guide and supporting forms look similar to Financial Markets Conduct Act 2013 market services licensing documents, this is not a licensing process. Accordingly, the FMA is not looking for the same level of detail, or supporting documents, as would be expected for a licence application.
  • The exemption does not seek to approve particular services – the focus is on the provider and its ability to meet the minimum standards set by the FMA. This means that an application could be made on the basis of a pilot offering, with flexibility to expand your services in the future.
  • Accordingly, the FMA is looking for applicants to provide a narrative which explains how the applicant is satisfied that it meets the minimum standards. The FMA also encourages potential applicants to engage with them early.
  • In terms of mechanics, there will be a one-off application fee of $1,265 (including GST), with the timeframe for processing of one to three months (plus approximately a week for the provider’s name to be added to the exemption notice). The FMA hopes to be able to process applications as close as possible to the one month end of the range – but this will depend on demand and the quality of the application.

Our practical tips

When preparing an application, the required information can be divided into two categories. The first category covers mechanical matters, such as Financial Service Providers Register number and company number. These should be reasonably easy to source.

The second category covers more substantive matters, such as a description of the proposed service. This is where your ‘narrative’ comes into play.

Internal business case documentation and Board papers may be useful sources for this information, if your internal thinking has progressed to the stage where you have drafted these documents. Similarly, information relating to IT systems and any third party service providers engaged should be able to be taken from internal due diligence and RFP documentation, as well as the resulting agreements with relevant providers.

If the proposal to provide robo-advice is at an early stage internally, you may not have these documents available. In that case, thought will need to be given to how you want to provide your services, manage associated risks, and ensure you have the right people and systems in place – and how these matters are best documented.

The FMA has made it clear that smaller businesses may have less in the way of formal documentation than larger businesses. However, as outlined below, having processes written down from the start may make ongoing monitoring easier.

How to comply on an ongoing basis

Providers approved to rely on the exemption need to make sure that they can comply with its terms and conditions on an ongoing basis. Any failure to comply with a condition of the exemption will result in the exemption ceasing to apply – and the provider being in breach of the Financial Advisers Act 2008 (‘FAA’). Due to the nature of an exemption, no enforcement action is required from the FMA, and the FMA has limited ability to provide relief in that situation.

In addition to the conditions of the exemption, providers will also have obligations under the FAA (such as an obligation to exercise the requisite level of care, diligence, and skill) and other legislation (such as privacy and anti-money laundering obligations).

Accordingly, ongoing compliance is just as important as the initial application process, and robust systems and processes will need to be in place from day one.

The good news is that those relying on the exemption will be able to continue to do so during the FSLAB’s two year transition period, without needing to meet the new Code of Conduct competence, knowledge and skill standards relevant to digital advice. Being able to access this transitional relief may tip the scales when weighing up whether or not to provide robo-advice.

The key ongoing obligations, and some practical tips for discharging them, are as follows:

Disclosure

Each provider must disclose the information set out in Schedule 2 of the exemption to each retail client that uses their digital advice service. These disclosures are modelled on existing AFA obligations, and include matters such as the nature and scope of the service.

The key differences are that there is no prescribed form for the disclosures, and that there is flexibility around timing of disclosures (the only requirement is that they must be given before or at the same time as the client receives the service). The FMA is keen to see providers make the most of this flexibility, by structuring disclosures in a way that customers can understand.

Guidance for discharging this obligation can also potentially be taken from:

  • Existing AFA disclosures (including the AFA disclosure regulations and explanatory notes).
  • The FMA’s Effective disclosure guidance note, which sets out the FMA’s views on clear, concise, and effective disclosure in the context of financial product offerings. This is particularly relevant as Code Standard 6 of the Code of Professional Conduct for AFAs (requiring information to be communicated clearly, concisely, and effectively) applies.
  • In some circumstances, existing managed investment scheme manager documents. For example, the conflicts disclosure obligation in Schedule 2 is a modified version of the disclosures required to be provided by fund managers when registering an offer on the online Disclose register.
  • The conduct obligations that will apply (as outlined below). For example, Code Standard 1 requires providers to put clients’ interests first. This means the disclosures provided must put clients’ interests first – meaning that a long list of ‘legals’ with a tick box for acceptance is unlikely to be appropriate.

Providers will also need to regularly check their disclosures against the service and Schedule 2 of the exemption notice, and carry out testing to ensure that clients will receive the required disclosures regardless of their responses to each question during the advice process.

Conduct

Considerable thought will need to be given to the conduct obligations applying under the exemption.

Each exempt provider must have procedures in place that give reasonable assurance that it will comply with Code Standards 1 to 3, 5 to 7, and 9 to 11. As these apply ‘with all necessary modifications’ as if the service was provided by an AFA, considerable thought will need to be given to how they apply to your service – particularly as the application of certain Standards will differ depending on the particular service. For example, Code Standard 1 provides that the actions required to place the client’s interests first will depend on what is reasonable in the circumstances.

As a starting point, we suggest mapping each of the obligations against your service and how you expect it to operate. This will allow you to consider each Code Standard in the context of your particular offering.

Once you have completed that mapping exercise, guidance as to how to discharge the conduct obligations can be taken from the FMA’s information sheet, and existing AFA resources (such as existing processes in place for AFAs and the AFA information on the FMA’s website).

Ongoing compliance with minimum standards

Providers will need to ensure that they continue to comply with the FMA’s minimum standards on an ongoing basis. In short, this means continuing to do what you said you would in your original application.

A failure to comply with the minimum standards will, unless the required notification is made to the FMA, result in the exemption ceasing to apply.

Specifically, under the exemption a provider must notify the FMA as soon as practicable after forming the belief that a ‘material change of circumstances’ (as defined) has or may have occurred, or is likely to occur. This covers both ‘good character’ changes in relation to directors and senior managers, and other changes that materially and adversely affect the provider’s ability to provide the digital advice service effectively.

The notification must be sent as soon as practicable after the provider forms the relevant belief, and the exemption cannot be relied on between the time the report should have been sent and the time that it is actually sent. The issue that gave rise to the notification obligation does not need to have been fixed at the time the notification is sent, although during that time the service may need to be suspended (for example, if you will not be able to discharge your obligations during the period the issue remains unresolved).

To discharge these ongoing compliance obligations, providers will need to:

  • Appropriately document all of the minimum standards and the statements made to the FMA during the application process.
  • Put in place processes to monitor the service against those matters, and to identify relevant changes. This includes building ‘triggers’ into processes when there is a change, to ensure consideration is given to whether the FMA needs to be notified.
  • Ensure there is appropriate reporting, both within the business (such as to the Board or another governance committee) and from any third party service providers engaged to assist with the service.

The FMA has made it clear that it is best to notify if in doubt (particularly in light of the ‘is, may, or is likely to’ threshold).

As the exemption is new, there is an opportunity to build these measures into processes from inception, rather than retrofitting them at a later stage. This means that they can be purpose-built for your particular service, taking into account any plans for future expansion.  

What next?

Now that applications are open, the process for collating all of the required documents and drafting applications can begin.

Preparing a high quality application that specifically addresses the questions in the application guide will be crucial to ensuring that the FMA can make a decision as soon as possible.

The FMA has also made it clear that it will not be accessing your services or the underlying technology. Accordingly, it is important that you that you can meet your ongoing disclosure, conduct, and competency obligations, by having the right policies, procedures, and controls in place from the start.

For those interested in the digital advice space, there seems considerable strategic merit in at least developing a pilot to utilise the exemption before FSLAB comes into effect. Doing so enables you to access transitional relief from competence (i.e. capability) requirements that would otherwise apply, with digital advice otherwise needing to be supported by a full market services licence under the new regime.

Start a conversation

If you would like assistance with a specific briefing on the exemption, what the exemption may mean for your business, or 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, Nicole Xanthopol on +64 9 914 7252, or email the team at bankingandfinancialmarkets@kensingtonswan.com

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