Archive:July 21, 2016

Massachusetts issues guidelines for using third-party robo-advisers
Bank of England Launches FinTech Accelerator
Impact of Brexit and UK FinTech

Massachusetts issues guidelines for using third-party robo-advisers

By Susan P. Altman and C. Todd Gibson

In April 2016, the Massachusetts Securities Division issued a policy statement with respect to the fiduciary obligations of state-registered advisers providing robo-advice.  The MSD has now issued further regulatory guidance in a new Policy Statement with respect to the use of third-party robo-advisers by state-registered investment advisers.  The MSD noted the significant growth in popularity of third-party robo-advisers and the increasing number of state-registered investment advisers working with third-party robo-advisers.

The new guidance describes minimum disclosure that state-registered investment advisers using third-party robo-advisers must provide to investors in order to meet Massachusetts regulatory requirements, including:

  • Clearly identifying the robo-advisers and explaining their services;
  • Notifying investors that, when applicable, they could get the services directly from the robo-adviser without paying additional fees to the state-registered investment adviser;
  • Describing the value provided to the investor by the state-registered investment adviser;
  • Specifically identifying the services the state-registered adviser cannot perform, such as having no ability to access, select, change or customize the portfolio structure or investment products at the robo-adviser;
  • Identifying limitations of available investment products offered to the client through the robo-adviser; and
  • Using customized, easy-to-understand disclosure language.

Most importantly perhaps, the investment advisers must charge an advisory fee that is reasonable in light of fees charged by others providing essentially the same services.  An investor is usually charged a fee by both the investment adviser and the robo-adviser based on a percentage of the investor’s assets under management.  Massachusetts state-regulated advisers will have to demonstrate the value behind the fees they charge on top of the robo-adviser’s fees, such as specialized knowledge of the products or the investor’s personal circumstances.

The Policy Statement can be found here.

Bank of England Launches FinTech Accelerator

By Jonathan Lawrence

On 17 June 2016 the Governor of the Bank of England announced that the Bank is launching a FinTech Accelerator to work in partnership with FinTech firms to harness innovations for its own requirements as a central bank. In return, it will offer firms the chance to demonstrate their solutions for issues facing policymakers.  The Accelerator will deploy innovative technologies on issues that matter to the Bank’s mission and operations. The Accelerator will appoint FinTech firms to run short Proof of Concept (POC) projects in a number of priority areas.

Some examples of current projects:

  • BitSight: Uses publicly available bulk data to assess firms’ cyber resilience, including looking for evidence of malware on a firm’s systems, signs of known software vulnerabilities, or weak encryption, which can be used to form a view on the information security of a firm over time. For the POC, the Bank’s own resilience will be evaluated.
  • Privitar: Provides tools to anonymise and desensitise data. The Bank will first test this software on a manufactured dataset to examine the analytical value of the desensitised data. It will then look to assess the capability of the tool on data held internally to establish if this will allow the Bank to provide wider access to data for researchers within the Bank.
  • PwC: Understanding the technology of blockchain and distributed ledger, working with PwC. The team built a multi-node scalable distributed ledger environment, which contained several smart contracts to illustrate the applications of the technology. This has enabled the Bank to better understand the resiliency benefits and practical limitations of the technology.

The Bank is interested in new ways of structuring and analysing large data sets and data gained in regulatory reporting. Other areas of interest are around machine learning, particularly in relation to anomaly detection and pattern recognition. The Bank would welcome expressions of interest or proposals for the Bank to participate in, or act as a silent observer or partner with an existing pilot distributed ledger network. Pilots should test how the technology functions in ‘real world’ scenarios.

Impact of Brexit and UK FinTech

by Jonathan Lawrence, Stephen Moller, Jacob Ghanty and Tom Wallace

A month has passed since the UK referendum vote to leave the European Union. Now that the initial dust is starting to settle, we have set out to examine various potential impacts on the UK FinTech sector. We consider areas including:

  • regulation and passporting
  • data protection and data sharing
  • anti-money laundering and know your customer
  • human capital
  • the role of banks
  • London as a global FinTech centre
  • venture capital

For our long form insight piece, please click here.

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