Australia: Regulating digital financial product advice consultation paper released

Last Updated: 17 April 2016
Article by Narelle Smythe, Matthew Daley and Welton Chan

Most Read Contributor in Australia, August 2016

Key Points:

Licensees are encouraged to make a submission so the "Providing digital financial product advice to retail clients" Regulatory Guide is as facilitative and helpful as possible.

On Monday, 21 March 2016, ASIC released Consultation Paper 254 Regulating digital financial product advice that included a draft Regulatory Guide "Providing digital financial product advice to retail clients". The release is a welcome development. The provision of digital advice has the potential to grow rapidly as an accessible, trusted and low-cost service which is affordable to retail clients.

However, while welcome, the draft Regulatory Guide does not deal with some of the key regulatory issues impacting on digital advice, including the extent to which digital advice is general or personal advice; and while it sets out certain minimum ASIC expectations relating to scaled advice and the best interests duty, it leaves open critical questions in relation to how to appropriately scale the advice in light of the best interests duty.

The Regulatory Guide builds on existing ASIC guidance and regulatory concepts. Key issues covered include:

  • the organisational competence obligation for digital advice licensees;
  • the ways in which digital advice licensees should monitor and test their algorithms; and
  • the minimum steps digital advice providers should take to comply with the best interests duty when providing "scaled advice" (personal advice that is limited in scope) to retail clients.

Organisational competence obligation

ASIC has proposed that digital advice licensees must have at least one responsible manager who meets the training and competence standards as set out in Regulatory Guide 146: Licensing: Training of financial product advisers.

Currently, the Corporations Amendment (Professional Standards of Financial Advisers) Bill 2015 is under consultation and if it is enacted, higher training and competence standards will apply to advisers. ASIC expects these standards will then be applied to digital advice licensees, meaning the responsible managers must meet the standards in that Bill, including:

  • meeting the higher training and competence standards (ie. have a degree or equivalent qualification, pass an exam, complete a professional year and undertake continuing professional development); and
  • complying with the proposed ethical standards (that is, comply with a code of ethics and be covered by an approved compliance scheme).

Adequate human resources

Licensees are required to have adequate human resources to provide the financial services authorised by its licence. To satisfy the human resources requirement in respect of digital advice, ASIC expects the licensee to have at least one person who has:

  • an understanding of the technology and algorithms used to provide digital advice. ASIC also expects the licensee to have people within the business who understand the rationale, risks and rules behind the algorithms underpinning the digital advice; and
  • the appropriate skills and experience to thoroughly review the quality of the digital advice provided.

Monitoring and testing digital advice algorithms

As part of establishing and maintaining an adequate risk management system, ASIC has indicated ways in which licensees who offer digital advice to retail clients should monitor and test their algorithms. In particular, ASIC has indicated these licensees must:

Design and testing algorithms

  • have appropriate system design documentation that clearly sets out the purpose, scope and design of the algorithms including decision rules or decision trees which display decisions and their possible consequences;
  • have a documented test strategy which includes test plans, test cases, test results, defect resolution (if relevant), and final test results that explain the scope of the licensee's testing of algorithms;

Changing algorithms

  • review and update algorithms whenever there are factors that may affect their currency such as market changes and changes in the law, have appropriate and secure processes for managing any algorithm changes, and be able to control, monitor and reconstruct any algorithm changes over a seven year time-frame;

Dealing with algorithm errors

  • have controls and processes in place to suspend the provision of advice if an error within an algorithm is detected; and

Reviewing the performance of algorithms

  • have in place adequate resources, including human and technological resources, to monitor and supervise the performance of algorithms through an adequate and timely review of the advice provided.

Providing scaled advice in the best interests of clients

The following requirements are some of ASIC's minimum expectations to assist digital advice providers in providing scaled advice that is in the best interest of clients. Digital advice providers should:

  • explain to the client from the outset the scope of the advice; that is, what advice is being offered and not offered;
  • require the client to actively demonstrate that they understand that the advice they are seeking is within the scope of advice offered, for example, by requiring the client to acknowledge the scope of advice being offered or the client to answer questions to actively communicate that the advice they are seeking is within the scope of the advice offered;
  • at key points in the advice process, inform (not through wordy disclaimers or fine print) the client about the limitations and potential consequences of the scope of advice; and
  • throughout the advice process, inform the client about key concepts, risks and benefits associated with the advice being provided.

The Regulatory Guide, however, does not provide additional guidance on how to appropriately scale the advice in light of the best interests duty. In addition, ASIC expects all personal advice to be scaled to some extent. The Regulatory Guide does not provide, for example, further guidance on the extent to which digital advice is general or personal advice. As providers build profiles of hypothetical investors, providers may not need to collect personal information from customers. This leaves a question as to whether a reasonable person might expect the provider to have considered one or more of the customer's objectives, financial situation and needs.

ASIC has also indicated that digital advice will not be suitable for some clients and it will closely scrutinise situations where all clients have been provided with digital advice. ASIC expects digital advice providers to:

  • use a "triage" process where clients for whom the advice being offered is not suitable, or who want advice on a topic outside the scope of advice are filtered out; and
  • take the necessary steps to inform their clients about the limitations and key concepts of the digital advice being provided, in particular where the potential consequences of their decisions are significant.

Reviewing advice

ASIC expects digital advice licensees to:

  • use human advisers to review samples of digital advice. Reviews should be conducted by assessing all the information (as opposed to using a "tick-a-box" approach) and using a human reviewer's judgment in assessing the quality of digital advice provided;
  • initially conduct frequent reviews of digital advice and exercise heightened scrutiny when any change to an algorithm is made. Recommended scrutiny includes running test scenarios to test the quality of advice provided; and
  • regularly monitor and test algorithms through periodic and random advice reviews.

When dealing with errors, licensees are expected to:

  • understand that suspension of an algorithm alone is unlikely to sufficiently rectify the problems (with the defective advice) and licensees may also need to lodge a breach report with ASIC; and
  • take additional steps to review advice that may be defective. ASIC expects licensees to remediate clients who have suffered a loss as a result of the defective advice being provided.

Effective communication

As there is no human adviser directly involved in providing digital advice, ASIC has stressed the importance of digital advice providers to carefully consider their website design, digital communication and digital disclosure through a user-focused approach which places the client's needs first.

Next steps

As an accessible, trusted and low-cost service, digital advice offers significant benefits to customers. ASIC has released the draft Regulatory Guide for comment. Licensees are encouraged to make a submission in order to assist in making the Regulatory Guide to be as facilitative and helpful as possible. If you would like to make a submission, you must do so by 16 May 2016.

Our Banking and Financial Services team can assist you to understand the impact of the draft Regulatory Guide and make a submission.

You might also be interested in...

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.