Robo Advice Regulation Movement in Three Jurisdictions

by Jim Bulling and Michelle Chasser

After increasing concerns that robo-advisers may not fit neatly into existing regulations, Australian, United States and United Kingdom regulators have all indicated in the last few months that they will be looking at the appropriateness of current regulations for the increasingly fast growing industry of automated financial advice.

The Australian Securities and Investments Commission (ASIC) has acknowledged that the finance industry needs to seize the opportunities that come with the digital age but at the same time consumer trust and confidence in the sector must be maintained. As a result, ASIC has set up the Robo-advice Taskforce which will focus on how robo-advice providers will comply with the best interests duty, how software algorithms will be developed and tested, the training and competency requirements of those running the robo-advice platforms, and the compensation arrangements of robo-advice providers.

See Greg Medcraft’s speech here.

United Kingdom
The UK’s FCA launched a Financial Advice Market Review in August 2015 to examine how financial advice could work better for consumers. In particular the review will consider new and emerging technologies, such as robo advice, and the opportunities and challenges they present.

The FCA is also introducing a ‘regulatory sandbox’ in which businesses can test robo-advice models without immediately incurring all of the regulatory obligations that those businesses would normally have. The sandbox will help industry participants and the FCA consider:

  1. Regulatory barriers and how and to what extent they can be lowered
  2. What safeguards should be in place for consumer protection during testing
  3. The legal framework including the impact of proposed EU legislation.

Proposals from businesses wishing to be included in the sandbox will be accepted from spring 2016 (northern hemisphere).

Information on the regulatory sandbox can be found here.

United States
In a recent speech to the Harvard Law School SEC Commissioner Kara Stein commented that the SEC “is now challenged with thinking through what it means to regulate a robo advisor”. Of particular focus is the fiduciary duty, which includes the requirement to act in the client’s best interests, and how it could be complied with by robo-advisers. Depending on the robo-advice model used, some businesses must comply with the fiduciary duty while others are not.

Currently the fiduciary duty applies to investment advisers registered with the SEC or state securities regulators. The Department of Labor has recently proposed to expand the fiduciary duty to retirement investment advice. The SEC has been looking at creating a uniform rule for the fiduciary duty for a number of years but it is yet to issue any draft guidance. SEC chair has commented that it is a complex issue and SEC staff are working to prepare a recommendation for discussion with the commissioners.

See Commissioner Kara Stein’s speech here.

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