This is the second part of a blog series about how automated advice providers can ensure compliance with the Best Interests Duty. This entry will address some of the measures digital advice providers can take to ensure compliance with the Act, drawing on ASIC's recent Consultation Paper (CP 254) and draft Regulatory Guide (RG 000). Read the first blog here.
What does ASIC recommend?
ASIC has made numerous proposals as to how a digital advice provider can ensure compliance with the best interests duty and meet the safe harbour requirements.
- Scoping or Scaling
Scaling means that personal advice is limited in scope. All personal advice is scaled to some degree. Traditional financial product advice usually involves the adviser limiting the scope of their advice via a conversation with the client. In the context of digital advice, however, conversations will not always take place because no natural person is providing the advice. ASIC has, therefore, outlined specific minimum expectations for digital providers offering scaled advice.
A digital advice provider should explain to the client from the outset what advice is being offered, and what is not being offered. They should require the client to actively demonstrate that they understand the scope of the advice being offered and at various stages inform the client about the limitations and potential consequences of this scope. It is equally important to filter out clients if the advice being offered is not suitable or does not meet their needs. It is integral that potential clients understand that this mode of advice is not, and cannot be, holistic. Early disclosure of the scope of the digital advice can prevent complaints and/or disputes at a later date. Further, information regarding costs, dispute resolution processes and the available processes for withdrawing from advice should be provided. Overall, ASIC suggests that a digital advice provider should think very carefully about the way they communicate with clients and ensure that the communications are user-focused, clear and timely.
- Triaging
In addition to scaling, a digital advice provider must implement a triage process to filter out clients for whom the digital advice is not suitable. This involves testing whether the advice being offered is appropriate and in the best interests of the client. As mentioned above, if a client seeks advice on an area outside the scope of the advice being offered, the client should be filtered out of the digital advice model. Another major component of triage is that if a client provides inconsistent answers in relation to their relevant circumstances, a digital advice provider must respond promptly. A provider must identify the inconsistencies, contact the client, provide them with additional educational information and offer them an opportunity to change their input. Alternatively, the provider must filter the client out of the model.
Reviewing digital advice and testing algorithms
Another key requirement that ASIC addresses is the process of reviewing digital advice. Just as traditional financial product advice must be reviewed, a sample of digital advice provided should be reviewed by a human adviser for compliance with the law. An important aspect of this review process is to monitor and test the algorithms used to provide the digital advice. If problems are detected, immediate steps need to be taken to rectify the issue, and advice should not be provided until the algorithm is functioning properly. Records should be kept of all testing. We offer 'shadow shopping' services to our clients where we test digital advice algorithms for flaws or glitches.
ASIC's Consultation Paper and draft RG provide further details on how digital advice providers can best ensure compliance with s961B of the Act. Click here to view these documents in full.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
