FMA rules could stop KiwiSaver robo before it starts

Plans that would allow roboadvice to enter the New Zealand market as early as next year may stop KiwiSaver providers getting involved.

Thursday, July 6th 2017, 6:00AM 4 Comments

by Susan Edmunds

Larissa Vaughan, head of legal at Kiwibank

The Financial Markets Authority is consulting on its proposal to offer an exemption to allow personalised roboadvice to be offered under the existing law.

It has been concerned that there is too much time still to wait before the Financial Services Legislation Amendment Bill becomes law and makes roboadvice possible across the board.

But among its proposals is an exclusion, in which the FMA said it could consider limiting the total investment amount of products a roboadvice service could advise on, such as to a maximum of $5 million.

“This may help mitigate the overall risk of harm if a roboadvice service fails," it said.

"However, it may be difficult to set an appropriate total limit given the different size and scale of the roboadvice services and providers who may rely on the exemption. We could consider applying two limits, with a higher limit for entities that are QFEs. This would recognise that these businesses undergo an initial assessment to obtain QFE status and are subject to ongoing supervision by us; and they are required to comply with ongoing QFE obligations and conditions.”

Larissa Vaughan, head of legal at Kiwibank, said that cap was inappropriate. She addressed the Financial Markets Law Conference in Auckland last week.

“With KiwiSaver, most providers are going to have more than $5m. The top six are all in the billions and even the smaller KiwiSaver providers have well over $5m. That would mean that none of those providers can give roboadvice, which is one of the things I understand the FMA wants to achieve through this.”

Vaughan said there were not enough advisers to give the advice KiwiSaver members would need.

She said there was one AFA for every 1500 KiwiSaver members and it would take an adviser three years to service that number of clients.

“We know we have a numbers problem and roboadvice can help with that.”

She said some people were also put off using an adviser by concerns about the cost, or because they found it intimidating. “Roboadvice does help solve that problem.”

She said the risks could not be ignored and any systems would need to be kept well up-to-date with legal changes that could affect it. There was a risk that the tools could provide advice that was not suitable and might miss the “EQ” factor an adviser could offer. But she said qualitative controls would be more effective than the quantitative limitations the FMA has suggested.

IFA president Michael Dowling said advisers would fit in where products, or clients’ circumstances, were more complex. “That may be where it evolves to.”

Tags: AFA FMA IFA Kiwibank KiwiSaver QFE roboadvice

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Comments from our readers

On 6 July 2017 at 7:42 am MPT Heretic said:

Yes the cap is inappropriate. It should be $0. If the FMA is really concerned about investors getting access to financial ADVICE they would ensure that any roboADVICE solution is not linked to a product and its revenue. Problem solved.

Of course that wont happen because providers are only concerned with $ and what the FMA really mean when they say roboadvice is automate the risk profiling cnd cashflow tools so that KiwiSaver clients will be directed into the PRODUCTS owned by whichever providers website they happen to land on. Then no one can point the finger and claim that all these pesky KiwiSaver investors are not getting advice.

KiwiSaver was structured from day 1 with no thought or revenue to provide investors with actual advice and now the officials are scrambling to fill the gaping hole that they themselves have created.

This talk that you only need 'real' advice for complex products or circumstances is rubbish. Investors lose plenty of money by making bad decisions using simple products every day.

On 6 July 2017 at 8:51 am Brent Sheather said:

You have to laugh when the employees of institutions which exclusively sell high cost products talk about the risk of providing advice that was not suitable. The humour continues when said dispenser of high cost products warns that some people are put off using an advisor because of concerns about the cost. As various people have noted and a common sense analysis confirms the rationale for robo advice in NZ is not to improve outcomes for retail investors it is simply as another distribution channel for vertically integrated organisations own high cost products. Furthermore the beauty of robo advisors is that unlike some bank employees at the frontline they don’t have ethics and won’t talk to the media when compelled to sell unsuitable products to clients and friends.

Equally hilarious is the contention that the FMA will stand in front of this steamroller. It would be a singularly bad career move. A bit sad really. Robo advice done properly i.e. how it is done overseas could be a good deal for retail investors but it won’t be. Another opportunity lost to bank regulatory capture.

On 6 July 2017 at 9:05 am Barry Read said:

The insurance limits are $100K sum insured or a contract duration of one year or less. Not a whole lot of room for innovation.. Carry On.

On 6 July 2017 at 10:31 am R1 said:

Well said Brent; right on the mark. And no doubt retail investors will fall for the fact they can have their robo-portfolio balance included on their bank statements and not be fully informed of the high fees they will be paying for the convenience; and it will all be okay by the FMA.

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