Robo advice for financial matters – proposed law change brings this closer to reality

In October 2017, the Financial Markets Authority (FMA), which plays a critical role in regulating capital markets and financial services providers in New Zealand, has agreed to grant an exemption to allow financial advisers to provide certain types of personalised digital advice services (also referred to as robo advice) to consumers through a digital advice facility.  The exemption applies to robo advice given to consumers either through a website or a mobile app, with moderate to minimal human intervention, where digital advice provided is based on a set of mathematical rules or algorithms.

The exemption is intended to be a temporary fix to the current requirement under the Financial Advisers Act 2008 (FAA) for personalised financial advice to retail clients to be provided by human being.  While the FAA will be overhauled by the Financial Services Legislation Amendment Bill to allow for automated personalised advice, the changes will unlikely come into effect until mid 2019.

FMA application process and exemption conditions

In order to rely on the exemption, a provider must be approved by the FMA and be named on the exemption.

The FMA has now finalised the form of the exemption and is open to receive applications from providers.

As part of the application process, a provider will need to provide the FMA with information showing that their directors and senior managers meet good character requirements, and that the provider meets minimum standards demonstrating their capability and competency to provide the personalised robo advice.

The exemption applies to personalised services provided to retail clients in relation to financial advice or investment planning services, and certain eligible products including interests in KiwiSavers schemes and other managed funds, listed equity or listed debt securities, Government bonds, general and personal insurance products, mortgages and other credit contracts, and savings products.

The exemption contains  conditions relating to disclosure, compliance with the code of professional conduct, record keeping, and notification obligations that a provider must comply with in providing personalised robo advice.

Future of robo advice in New Zealand

Robo advisers do operate in other jurisdictions such as the United States, Australia, Canada, Germany, the United Kingdom, China, France and India, so there is a wealth of experience for New Zealand to draw on as it moves away from solely human advisers.

There are financial benefits to financial institutions being able to provide financial advice by robo advisers (in that robo advisers, in theory, are cheaper than human advisers), and robo advisers can in all likelihood be trusted to provide advice to a consistent standard that is both dispassionate and commercial.  Automated systems are also able to process large volumes of information quickly, and (it is to be hoped) without errors in analysis.

As well as providing benefits to financial institutions, the ability to receive advice from a robo adviser would have benefits for customers.  A wider range of customers would have access to robo advisers than to human advisers, and again, there is the consistency of advice that would be provided.  Robo advisory services would be available 24 hours a day, 365 days a year.  With the speed at which the algorithms work, advice would be provided without delays.

Perhaps the most obvious downside to robo advice is that it is impersonal and (frankly) robotic.  There is no ability for a robo adviser to assess the hopes and aspirations of the customer, or to hear, understand and (hopefully) allay the anxieties of the customer.

Online robo advice tools are also susceptibility to cyber attacks and hacking, and algorithms can fail.

Finally, data protection laws around the world are constantly being updated, and there are changes proposed to New Zealand’s Privacy Act 1993 in a Privacy Bill that was introduced to Parliament for its first reading on 20 March.  In the context of robo advice it is interesting to see that the European Union’s new General Data Protection Regulation provides that European Union citizens have the right not to be subjected to automated decision making, albeit with some exceptions.  This could be something to keep an eye on as the Privacy Act 1993 is updated if a similar regime is proposed for New Zealand residents, as it could impact on the manner in which robo advice is able to be provided.

Business Law team

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Gerard DaleClaire EvansGraeme CrombieEvelyn JonesAnna RyanJoelle Grace,  Peter OrpinEllen SewellMatt TolanCarlo WanKristina SutherlandJacob NuttWhitney MooreAlex StoneBen Cooper, Lisa Catto

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