In this fifth Financial Law Insight in our FinTech Series we look at the draft exemption documents released by the Financial Markets Authority in relation to its planned exemption to facilitate the provision of robo-advice, including:
For those interested in this initiative, the FMA’s release gives plenty to get your teeth into. Here are our preliminary thoughts.
The exemption will allow personalised robo-advice to be given to retail clients by an entity. It would treat 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.
Release of the draft exemption documents follows consultation earlier in the year on the proposal, and the subsequent announcement that the exemption would be granted subject to modification of some of the proposed conditions (see here for further details).
What is the FMA seeking feedback on?
The consultation pack contains the draft exemption notice, information sheet, application form, ‘good character’ declaration, and application guide – 49 pages in total.
There are only seven consultation questions, which can be summed up as:
While the FMA’s thoroughness is to be admired, the length of the documents alone shows how far the proposals have shifted. The initial proposal was that a provider simply had to notify the FMA in advance that it intended to rely on the exemption, provide ‘good character’ information, and could then proceed once the FMA had confirmed in writing that it had no objections. What has eventuated looks a lot more like the licensing regime under the Financial Markets Conduct Act 2013 (‘FMCA’), with a full application and approval process needing to be followed.
This in itself may deter some providers from following through with plans to rely on the promised relief, particularly those only looking to rely on the exemption for certainty (for example, personalised mass client communications that risk being construed as containing financial advice). Others may find comfort in the extent of the details outlined and rigour involved.
Some key points
The documents reflect the headline – an exemption to enable personalised digital advice. It’s in the detail where it gets interesting.
We think the draft information sheet outlining the exemption is good – and a useful short form summary of how it is intended to work, complete with examples.
The application guide, on the other hand, is very detailed. It clearly sets out the information that the FMA is looking for and the processes it expects to see in place, without locking in any particular model. However, there are some aspects of the proposed process worth delving into.
The first is that the FMA will charge a fee of $1,265 per application to rely on the exemption. This is the amount charged for an exemption application under the Financial Advisers Act 2008 (‘FAA’) – which is technically made up of a $115 application fee and an advance on the FMA’s hourly fees, although there is no suggestion in the application guide that applications that take longer than expected will trigger the payment of additional fees.
The charging of fees may also explain why a provider must be specifically named in Schedule 1 of the exemption notice in order to rely on the exemption. This will require a formal variation to the notice for each provider, meaning a separate exemption application is technically made by each provider and the usual exemption application fees can be charged. The need to vary the notice for each newly accepted applicant may also delay the approval process.
This added layer of administration is not without precedent, but it is cumbersome. It implies the FMA may hold applications in pens and issue exemptions in groups. We don’t like this approach.
Turning to the detail, both directors and ‘senior managers’ must complete a good character declaration. ‘Senior managers’ subject to good character assessments during the application process are those persons (other than directors) with significant influence over the management or administration of the service provided through the digital advice facility. This will require a careful assessment of those involved in developing and maintaining the facility, as it is broader than the definition of the same term in the FMCA (which refers to the person’s influence over the provider as a whole). This is a significant shift in focus for the regulator.
If a provider fails to notify the FMA of a material change of circumstances within five working days after becoming aware of the change, five working days later the exemption will automatically cease to apply. ‘Material change of circumstances’ is defined to cover a change that adversely affects the provider’s ability to provide the financial adviser service through the digital advice facility in an effective manner, as well as good character issues such as criminal convictions. This inflexibility will no doubt cause some to pause, as the risks are high. We think this mechanism is overly blunt in its current form, and rings some alarm bells. We think a more flexible approach should be explored.
Providers will also need to keep records of each piece of advice given and the information relied on in giving that advice. This obligation will apply even where the client does not provide personal details, or adjusts the information they provide to test how those adjustments affect the advice given – potentially having major implications for data storage, given that the exemption also does not set a time period after which information can be destroyed. This seems inefficient and unnecessarily extensive. We would like to see this aspect tightened in the final version.
In our initial read, we have picked up three notable omissions from the draft exemption documents:
Consultation closes on 15 December 2017, and the FMA is still 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, depending on how long the FMA will take to process applications).
With the date for granting the exemption fast approaching, now is the time to review and test the details contained in the draft exemption documents against your advice models to flush out any issues before these documents are finalised.
It will be interesting to see how many providers apply now that the detail of the exemption has been confirmed.
Our prediction is that the number applying based on the final proposals will be significantly less than if the notification process originally outlined had been retained. This apparent shift in thinking perhaps reflects a recognition that the exemption involves a significant departure from the scheme of the FAA.
Start a conversation
If you would like assistance with making a submission on the proposed exemption, or 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, Nick Summerfield on +64 9 915 3357, Karen Mace on +64 4 496 5941, or email the team at firstname.lastname@example.org.