IOSCO weighs in on the growth of robo-advice

by DLA Piper

DLA Piper

7 At the end of December 2016, the International Organisation of Securities Commissions (IOSCO) published an update to its July 2014 Report on the IOSCO Social Media and Automation of Advice Tools Surveys

The aim of the surveys was to identify how market intermediaries are using social media and robo-advice, and how intermediaries and regulators are overseeing their use. New Zealand's Financial Markets Authority is a member of IOSCO, and we can expect New Zealand to pay attention to IOSCOs guidance as we prepare for the regulation of robo-advice on these shores.

The IOSCO 2016 survey update notes that technology tools will likely affect all elements of the advice value chain from customer profiling and asset allocation to trade execution and portfolio rebalancing. The key results and considerations from the update include:

  • Continued Growth: The market for robo-advice has continued to grow since the initial survey, with some analysts anticipating that global spending on digital wealth management initiatives will triple from $4 billion in 2015 to $12 billion by 2019. This is mainly due to expanding activity in jurisdictions where robo-advice was already being provided in 2014, although there has also been an expansion into jurisdictions where robo-advice was not previously present or allowed.
  • Products Recommended: Exchange Traded Funds and investment funds remain the most common investment products covered by robo-advice providers, but some jurisdictions are seeing the emergence of new and potentially higher-risk products and strategies. If robo-advice tools begin to offer more complex and speculative products then regulators and/or firms may need to take additional regulatory measures to protect investors.
  • Definitional Concerns: There is some ambiguity as to when the output from a robo-advice tool crosses the line from general investment information to customer specific advice/recommendations. Differing interpretations across jurisdictions could lead to differing regulation of some competing robo-advice firms offering automated advice across multiple jurisdiction – this could lead to a competitive advantage for firms that limit their robo-advice offering to jurisdictions with less stringent regulatory requirements in this area.
  • Range/Type of Advice: Robo-advice tools are starting to evolve to provide holistic financial planning (as opposed to focussing on investment advice and portfolio management). In some jurisdictions, this will likely raise questions regarding the standard of care required.
  • Inappropriate Advice in Mirror Trading/Guru Trading Scenarios: Some regulators are concerned about the operation of OTC (over-the-counter) derivatives trading platforms that encourage investors to mirror the trades of an 'expert' or 'guru'. These products are complex and speculative but are being aggressively marketed to retail investors. Assigning liability for inappropriate advice in these situations is also a concern.
  • Regulatory Supervision: Regulators are keeping pace with new technologies and are evolving their supervisory techniques. For example, a number of regulators are assessing the degree to which the algorithms, being robo-advice tools, should be reviewed.
  • Cybersecurity: Online robo-advice tools may be the target of attacks as cybersecurity threats increase.
  • Third-Party Tools: The use of third party provided robo-advice tools by firms may provide new entrants to the market with a cost-effective means to compete with more established firms, but regulators are dealing with issues as to the level of initial and ongoing reviews that firms should conduct on these tools and as to where liability attaches if the tool produces bad consumer outcomes.
  • Dedicated FinTech Regulatory Units: Those jurisdictions with a more developed robo-advice industry are considering or have established dedicated FinTech units or ‘regulatory sandboxes’ to engage with firms that deliver robo-advice. In addition to facilitating the development of technology, these units may be critical to developing regulators' capacity to determine policy and to monitor and regulate firms bringing new technology to the delivery of investor services.

The first step to the introduction of robo-advice in New Zealand is the proposed amendment to the Financial Advisers Act 2008. The Kaikoura earthquake in November 2016 has delayed the much anticipated release of Ministry of Business, Innovation and Employment's exposure draft and this in now expected to be released for consultation in early 2017.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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