In this first Financial Law Insight in our FinTech Series, we look at robo-advice in New Zealand, including:
There are a number of barriers to providing robo-advice under current law. However, the good news is that times are changing – impacting on both the regime regulating robo-advice, and the way the Financial Markets Authority (‘FMA’) will approach the issue.
In our February 2017 Financial Law Insight, we noted that the Financial Services Legislation Amendment Bill (‘Bill’) has been drafted to facilitate the provision of robo-advice, and that FMA is supportive of FinTech development.
Regulating for rapid technological innovation has been identified as a developing theme in the financial services industry in FMA’s Strategic Risk Outlook 2017. In particular, FMA has stated that it supports and encourages technological innovation in financial services, and considers its regulatory settings are flexible enough to embrace innovation.
The Bill was released for consultation in late February 2017, and will result in significant changes to the regulation of financial advice in New Zealand. It takes a tech-neutral approach to advice and will better facilitate robo-advice. However, it is expected the Bill will not come into effect until the first quarter of 2019 at the earliest.
What’s the current problem?
To date, the development of robo-advice has been constrained by the restrictions on providing ‘personalised’ advice under the Financial Advisers Act 2008 (‘FAA’). In effect, personalised advice can only be provided to a retail client by a natural person.
‘Personalised advice’ is advice given to or in respect of a readily identifiable client where the financial adviser has taken into account the client’s particular financial situation or goals (or any one or more of them) in providing the advice, or a client would in the circumstances reasonably expect the adviser to do so. Class advice is any advice that is not personalised advice.
An added complication, until very recently, was FMA’s very broad view of when personalised advice will be provided, expressed in its original 2012 KiwiSaver Advice guidance note.
The net effect of the FAA combined with FMA’s previous view of class advice, has meant that fully automated online advice tools could only legally be provided for ‘class’ advice or information only guidance, based on very limited investor information, to avoid the risk of being considered ‘personalised’ advice.
Developing a new financial advice framework
Fortunately, change is in the air.
The Bill, which reforms the FAA (see here for more detail), has been drafted to be tech-neutral, which will facilitate the provision of robo-advice. Under the proposed legislation, anyone who provides financial advice, including any robo-advice platform, will need to operate under a licence. The key factor for obtaining a licence that covers the provision of robo-advice will likely be the ability to demonstrate that the prescribed competency standards in the new Code of Professional Conduct (‘Code’) will continue to be met, regardless of the way the advice is delivered.
Development of the new Code will commence in the second half of 2017. The new Code will set minimum standards of competence, knowledge, and skills that advice providers will need to meet. These are likely to include specific minimum standards that apply to different types of financial advice and products. Accordingly, budding robo-advice providers should develop their service propositions early, so they understand the likely practical issues and can feed solutions into the Code via the submissions process. Knowing how you want your robo-advice proposition to operate now will give you the best chance of identifying key issues to focus on when submitting on the new Code. Having the Code aligned with your desired robo-advice model will pay dividends in your licensing process.
The ability to provide robo-advice under the new regime does not mean that FMA will review the algorithms underlying the advice platform. Rather, FMA has indicated that the focus of licensing will be on demonstrating that appropriate policies, procedures, and controls are in place such that the licensee is confident that the resulting advice will be up to scratch.
In addition, FMA has indicated general support for FinTech developments in its 2017 Strategic Risk Outlook. FMA has identified that the benefits of rapid technological innovation are worth pursuing, provided risks are managed well. Helpfully, FMA has also stated that its regulatory settings are ‘flexible enough to embrace innovation’.
Guidance from the Ministry of Business, Innovation & Employment, who are driving the Bill, indicates that the goal is introduction to Parliament this year and a two-year transitional period running from the first quarter of 2019. As a result, it is worth exploring the options available right now.
What can be done today?
FMA has stated it will not be following the lead of the United Kingdom and Australia in introducing a regulatory sandbox in New Zealand, meaning that all products will need to fit within the regulatory regime. A regulatory sandbox is an environment with certain control settings for testing a new FinTech product without a licence.
As a result, there are two main options available under current law:
Option 1: Exemption
At the panel session on the Bill hosted by Kensington Swan in February 2017, FMA indicated it is open to developing an exemption under the FAA to enable the deployment of ‘personalised’ robo-advice ahead of the FAA reforms under the Bill being progressed.
FMA subsequently stated in its May FMA Update that consultation on a proposed exemption will be released in the very near future.
Consistent with the views expressed by FMA in its 2017 Strategic Risk Outlook, any exemption would be subject to specified conditions aimed at managing risks associated with the exemption that would affect consumers.
Any exemption would be an interim fix until the Bill is enacted and providers are able to move into the new regime.
Option 2: Class-only model
In March 2017, FMA released a refreshed KiwiSaver Advice guidance note (‘Guidance Note’). The Guidance Note represents a sea change in the regulator’s view of what is ‘class’ or ‘personalised’ advice. The Guidance Note clarifies the boundary between what is ‘class’ or ‘personalised’ advice in the KiwiSaver context, and signals a significant expansion of what the FMA views as falling within the concept of ‘class’ advice.
The key takeaway from the Guidance Note is the comfort it gives to providers who wish to provide a class-only service but were wary of doing so in light of the views in the previous guidance.
Although KiwiSaver-specific, the concepts discussed in the Guidance Note can be applied to financial advice more broadly. As a result, the regulatory environment can now be seen as more conducive to designing a class-only platform that can provide useful advice in a manner consistent with regulator expectations.
In some ways, online advice tools can manage the risks associated with providing class advice more easily than traditional person-to-person discussions. For example, such a tool could limit the information collected (removing the risk of unsolicited disclosures of personal information) and very clearly disclose the limitations of the advice provided. Rather than replacing personalised advice provided by an individual, an online advice platform can be viewed as an effective tool to support one-on-one engagements with clients, giving advisers more time to focus on their value-add personal touches.
So what next?
Truly personalised robo-advice services will be possible once the Bill is in force or an exemption under the FAA is enacted.
In the meantime, there are options available to budding robo-advice providers – although care still needs to be taken to ensure that any new service does not stray into the realm of personalised advice in breach of current requirements. What is pleasing is that regulation is catching up with technological advancements, and the regulator is taking a proactive approach to facilitating those advancements being brought to market for the benefit of providers and their clients.
Start a conversation
If you would like a specific briefing on how you can provide robo-advice under the current regime, or more information about the Bill or the regulation of financial technologies, please contact Catriona Grover, David Ireland, Tom McLaughlin, Nick Summerfield, Karen Mace, or email the team at email@example.com.