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:
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.
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:
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:
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:
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.
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:
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.
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 firstname.lastname@example.org.