Roboadvice is coming
The Financial Markets Authority has laid out a plan to clear the way for roboadvice and says it has already had approaches from AFAs who want to offer the service to their clients.
Wednesday, June 21st 2017, 12:00PM 
5 Comments
by Susan Edmunds
Roboadvice will become possible as part of the review of the Financial Advisers Act. But the new rules will not come into effect until 2019 and the FMA is worried that is not fast enough.
It said it would mean an environment of reduced access to advice and barriers for innovation in the meantime. "We have received strong feedback from providers that they would like to offer personalised roboadvice sooner."
It is seeking feedback on a proposal to grant a class exemption for roboadvice providers from the requirement that personal advice to retail clients be given by a natural person.
“Advice generated by a roboadvice tool (on a provider’s website or mobile app) will be treated as advice given by a financial advice provider. The class exemption would be granted under the FA Act to permit personalised roboadvice to be provided under the current law. The FA Act will be repealed when the law reform comes into effect and all FA Act exemptions will be revoked."
Director of regulation Liam Mason said the exemption could be in force by the end of the year, if it was decided to go ahead. He said it could be possible that roboadvice offers would enter the market by early next year. "It's quite hard to gauge what the uptake would be. We've seen some interest already from a range of firms.:
The FMA said that should help to tackle New Zealand's advice gap, particularly for investors with small sums of money. Mason said a goal was to provide financial advice to those who were not currently receiving it, particularly around KiwiSaver,
But it said there were risks.
"Although roboadvice services are usually directed at consumers not currently served by existing providers, we recognise nevertheless that roboadvice could cause disruption to existing financial advisers with traditional business models.
"As with all advice, roboadvice carries a risk of poor consumer outcomes and there would be an associated reputational risk for the industry. Potential harm to consumers from unsuitable roboadvice or from the failure of one of the first roboadvice offerings could, in addition to the potential financial loss suffered by individual consumers, undermine consumer confidence and have a chilling effect on the development of this sector."
Mason said it was expected roboadvice would disrupt financial advice as a whole rather than specific advisers. He said the FMA had talked to a range of providers about services they wanted to offer, including big providers, AFAs and start-ups. "Some people are raring to go."
The exemption will not cover DIMS and will be limited to products that are easy to exit: KiwiSaver, managed funds, listed equity securities, Government bonds, listed debt, general insurance products and savings products and credit contracts, excluding mortgages.
The FMA said it could consider including personal insurance products but it had concerns some of them were not easily exited and the consequences of non-disclosure were high.
"Therefore, if included we are considering imposing a value cap or duration limit. This could limit the roboadvice to personal insurance products where: The sum insured is not more than $100,000 per product; or the duration is one year or less; or the contract can otherwise be cancelled easily."
It said it might also consider imposing an investment limit, such as $100,000 per client.
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Comments from our readers
I am not against robo-advice. It’s inevitable it will be introduced by product providers and platform managers. Lots of money will be spent – some of which will be poured down the drain. Robo is a scale game.
There was a consistent theme in banks’ submissions on the Exposure Draft of FSLAB that they should be allowed to offer personalised robo right away. A couple of large law firms engaged in some supporting PR about the same time. Coincidence?
FSLAB when passed next year will allow firms to do personalised robo probably from 1 March 2019. I have no problem with that.
However I believe in the rule of current law, and in particular the principle that the only place to change the law is Parliament.
The FMA consultation paper says FMA wants to use its exemption powers under the Financial Advisers Act 2008 [FAA]to allow firms to offer personalised robo-advice to retail investors now.
Currently firms can’t make such offers because of s18 of the FAA which reserves the right to offer personalised advice to retail clients to designated individuals. Firms are not individuals, so they are prohibited from so offering.
Now I agree the FMA does have wide exemption powers under the FAA.
Interestingly the Consultation paper does not quote the specific power. I think I know the reason why.
FAA s 148 (1) (a) says the FMA may exempt any person from “…….compliance with any obligation under this Act, the regulations, or the code.”
The key word is “obligation”.
My allegation is that FMA’s is ultra vires in that a prohibition under the Act is not an obligation. Therefore it cannot be fixed by an exemption.
An obligation is normally something you have to do when you are allowed to do something.
The issue is as simple as that
What FMA proposes usurps the role of Parliament to make or amend the law.
There is a lot of alleged and actual Government department and agency over-reach these days. This is a blatant example.
I hope there are some academics and lawyers who might be encouraged to wade into a debate.
The other reason robo-advice is being embraced so enthusiastically is that bank staff are pushing back against having to rip off their customers but robots have no conscience.
Regards
Brent
True robo-advice is a long way from being offered in NZ (despite opinions to the contrary), as there is little margin for manufacturers
Regards Scott
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The body of the story (2 pars later) gets it right where it says its providers who are wanting to offer personalised robo sooner - they currently can't because firms can't.
Watch this space tomorrow afternoon for an allegation that FMA's proposed exemption might be ultra vires by usurping the power of Parliament to make law.