Australian regulator consults on proposed guidance on robo-advisors

In particular, the ASIC is seeking feedback on how regulatory provisions that aim to ensure organizational accountability should apply to robo-advisors, and on obligations for firms to ensure that their algorithms are built and operating properly.

On the accountability issue, the ASCI proposes that digital advice firms be required to have at least one responsible manager who meets the minimum training and competence standards for advisors.

“This proposal will ensure that at least one responsible person within the digital advice licensee holds this level of competence,” the ASIC notes, adding that these requirements are likely to change as the government is also consulting on proposals to raise the professional, ethical and educational standards of advisors.

On the issue of the ways in which digital advice licensees should monitor and test their algorithms, the ASIC notes that if there is a problem with an algorithm, or an error with it, “a large number of clients may receive poor quality financial advice.” As a result, it says that firms offering digital advice must ensure that these algorithms “are properly designed, monitored and tested.”

The draft regulatory guide outlines the ways in which the ASIC says that digital advice firms should monitor and test their algorithms.

“ASIC is committed to helping industry take advantage of the opportunities offered by robo-advice while ensuring that investor and financial consumer trust and confidence is not compromised,” says ASIC commissioner John Price, in a statement. “ASIC is keen to see a healthy and vibrant digital advice sector. We see digital advice as having the potential to offer Australian consumers access to good quality, low-cost, financial advice.”

The consultation deadline is May 16, and the ASIC expects to issue final guidance in August.

Conflicts of interest

Also on Monday, the ASIC relased a report outlining its findings of an extensive review of the conflicts management practices in vertically integrated businesses in the funds management industry.

Some firms just go through the motions of addressing conflicts of interest within their businesses, the ASIC report suggests, rather than actually dealing with them.

The ASIC notes that it undertook a review of conflict management by these firms because it was concerned that firms with a vertically integrated business face more opportunity for conflicts to arise.

The regulator found that many firms appear to take their conflict management obligations seriously, “with detailed and tailored policies that appear to be embedded in business practices from boards and senior management, cascading down to business units.”

However, the ASIC also found that at some firms, “it appears that the conflicts policy is one of many policies which has been prepared to satisfy a regulatory requirement rather than seeking to properly identify and address conflicts and embed requirements to address conflicts into business practices.”

“It is clear that some organizations adopt a generic template conflicts policy, with no demonstrated commitment to the conflicts management in the organization. We saw some very real examples where the conflict in question was so fundamental that complete avoidance was necessary – the conflict could simply not be managed internally and disclosed externally,” says ASIC commissioner, Greg Tanzer.

The ASIC calls on firms to review the results of the report, and says that it will continue its focus on culture and conflicts management throughout the financial services industry.

“As our work on culture has indicated, the ‘tone’, being the attitude and commitment to conflicts management, must come from the ‘top’ and needs to be appropriately cascaded down the organization through business practices, communication and accountability, as well as appropriate governance and remuneration,” adds Greg Medcraft, chairman of the ASIC.