FMA considers fast-tracking personalised robo-advice
The Financial Markets Authority is considering using its powers to fast-track automated personalised financial advice ahead of the expected 2019 schedule in the latest overhaul of legislation governing the sector.
The market watchdog is seeking feedback on proposals to exempt personalised robo-advice, which has been adopted internationally as cheap financial advice using digital channels and relying on software algorithms rather than intensive research. The technology was blocked by legislation introduced in 2008 which dictated that personalised advice could only be given by a "natural person" and reforms currently underway aren't likely to come into effect for another two years.
The FMA's refreshed strategic outlook identified rapid technological change as an emerging theme it needed to be prepared for, and has also been been disappointed with the level of personalised financial advice, especially for KiwiSaver members with a report in 2015 finding just one in a thousand people getting tailored advice when joining or switching a scheme.
Director of regulation Liam Mason says the pace of development in the market was one of the reasons spurring the FMA on to pursue the exemption, as was its work on the review of existing financial adviser law.
"We're getting firms coming to us saying we're ready to go and what we're worried about is New Zealand loses an opportunity to keep pace," he said.
The FMA has released a consultation paper on whether it should provide a class exemption to robo-advice which would let it hit the market by the end of this year, and how that power should be applied.
The consultation is open until July 19, and Mason said the regulator wants to hear from a broad cross-section of society, including customers and consumer groups as well as industry players.
The regulator's paper recognises that robo-advice poses "greater risk in some areas than human advice" in that it doesn't pick up that some situations aren't suited to digital tools, consumers may not appreciate the limitations of getting advice through a digital platform, and that an online interface has limitations compared to human interaction.
"Due to the scalability of robo-advice, poor advice outcomes (for example, from an error in the algorithm) may affect a larger number of consumers," the document said. "The robo-advice tools available today also cannot do everything that a human adviser can, such as complex financial planning services."
If the FMA goes ahead with the robo-advice exemption, it expects to exclude the provision of discretionary investment management services and restrict the range of products to highly liquid instruments, such as managed funds, listed equity securities and debt, government bonds, general insurance, and savings products.
"We need to take care that the exemption limits and conditions strike an appropriate balance between protecting consumers and promoting innovation," the paper said. "If too restrictive, the conditions may impose undue barriers to innovative robo-advice offerings, making the exemption ineffective to increase access to advice and help address the advice gap during the period before the law reform comes into effect."
The FMA also wants feedback on whether it should impose an investment limit restricting the value of assets a client can use robo-advice for, although it said it doesn't currently plan to impose such a restriction.
Other conditions it wants feedback on include whether a provider needs to notify the regulator before offering the service, the types of disclosure required, how providers' conduct align with the Financial Advisers Code of Conduct, the capability of the tools, and investor safeguards such as client filtering and the systems and controls in place.