FMA consulting on robo-advice exemption and appoints new Code Working Group

The FMA has published a new consultation paper on whether it should grant a class exemption to enable “robo-advice” (personalised financial advice given by a computer programme or algorithm). The current Financial Advisers Act 2008 prohibits robo-advice, as personalised financial advice must be given by a natural person. In the recent review of the Financial Advisers Act, many submitters requested for a legislative change to enable robo-advice. The FMA has considered industry feedback and is consulting on a new class exemption to enable robo-advice, subject to certain restrictions.

In addition, as part of the review of the Financial Advisers Act, the new working group to develop a new Code of Conduct has been appointed, set out below.

Links to the FMA’s media release, the consultation paper, and the announcement of the new Code Working Group, are available here, here and here.

Robo-advice consultation

Who needs to read it?  Why?

All financial advice industry participants. The ability to provide robo-advice has the potential to fundamentally change the financial advice industry, allowing simple, low cost, financial advice to be delivered through a new distribution channel.

When does it apply?

The FMA’s aim is to have the exemption in force by late 2017. The final date for submissions is 19 July 2017. The Financial Advisers Act is currently being reformed, and those reforms are set to enable robo-advice to be provided. However, those reforms are not set to take effect until 2019. The exemption is aimed at enabling robo-advice to be provided before then.

What does it cover?

The exemption enables the provision of robo-advice by removing the requirement for personalised advice to be provided by a natural person. Advice generated by a robo-advice tool (a provider’s website or mobile app) will be treated as advice given by a financial advice provider. The FMA proposes that the exemption should be subject the following limits and conditions, to ensure that consumers are adequately protected:

  • Limited to financial advice and investment planning services: The exemption cannot be used to provide discretionary investment management services. The FMA is asking the industry whether it is appropriate to include investment planning services in the exemption.
  • Limited to “easy to exit” products:  The exemption can only be used to provide financial advice on products which are easy to exit. The proposed eligible products are: KiwiSaver and other managed funds, listed equity securities, government bonds, listed debt, general insurance products, savings products and credit contracts. The FMA is asking the industry whether personal insurance products should also be included.
  • Investment limits: The FMA is considering imposing limits restricting robo-advice to advice on investments below a threshold (suggested to be $100,000), or limits on the total amount of investment products a robo-advice service can advise on (proposed to be $5 million, but with a higher limit suggested for QFEs).
  • Providers must notify FMA in advance:  Providers must notify the FMA that they are intending to rely on the exemption before providing robo-advice, and must make a declaration that they are of good character. The FMA will have the opportunity to object to any provider using the exemption, or being of good character.
  • Clear disclosure obligations tailored to robo-advice: Before giving robo-advice the provider must give their client sufficient information so that they can make an informed decision to use the service or not. The consultation paper sets out suggested matters which should be disclosed to clients. The FMA is also suggesting that providers must include a clear and prominent statement of the status of their robo-advice service, that it is personalised advice and that it has not been reviewed or approved by the FMA.
  • Capability: The provider must have people with appropriate expertise in the technology and algorithms used, as well as appropriately qualified individuals who can oversee the advice generated. The FMA expects this will include employing Authorised Financial Advisers who are experienced in the robo-advice product set.
  • Investor safeguards: Providers must have appropriate processes to filter out clients who are not suited to receiving robo-advice, as well as processes to monitor and test the advice, resolve complaints, keep up to date records, and report any material breaches of the above conditions, among other requirements.

Our view

We support the FMA’s initiative to enable the provision of robo-advice. We have previously written on the importance of robo-advice to “millennial professionals” in an article by Lloyd Kavanagh and Tina Xu (available here).

The exemption is intended to allow robo-advice to be provided by “late 2017”. This a significant shift forward from the Financial Advisers Act reforms, which would enable robo-advice to be provided by 2019 at the earliest. From our experience market participants are ready now to provide robo-advice, and any move to enable robo-advice at an earlier date is to be welcomed.

What next?

Robo-advice providers should carefully consider the consultation paper, and whether the conditions on robo-advice being provided are appropriate. The FMA will be considering all submissions it receives, to work towards robo-advice potentially being enabled in late 2017.

If you have any questions in relation to robo-advice or would like help with making a submission on the consultation paper, please contact one of our experts.

Code Working Group

As part of the review of the Financial Advisers Act, a working group has been appointed to develop a new code of conduct. The members of the working group are:

  • Angus Dale-Jones
  • Barbara Benson
  • Brian McCulloch
  • John Berry
  • Graeme Edwards
  • Paul Mersi
  • Rebecca Vanderbom
  • Shane Edmond
  • Therese Singleton

The announcement of the Commerce and Consumer Affairs Minister can be found here.

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