One of the key expectations from the regulatory guide is that
providers of digital advice will be expected to monitor and test
the algorithms which underpin their offering (and maintain evidence
of testing). A record should also be kept of the purpose, scope and
design of an algorithm.
Similarly, the advice that is provided to clients should be
tested regularly, and providers should have in place procedures for
sampling of the advice provided.
ASIC has stated that the testing should:
Be conducted by individuals' suitability qualified to test
compliance with the law;
Not be a 'tick-the-boxes' exercise, and involve
consideration of all appropriate material (even if this is outside
of the digital advice provided);
Be conducted frequently during the commencement of services,
and then upon changes to the algorithm.
If the tests which occur identify breaches of the Corporations
Act, or are likely to cause loss to clients, providers are expected
to take steps to remedy this issue. This may involve:
Suspending and fixing the algorithm;
Lodging a breach report;
Remediating clients who have suffered losses.
Acknowledging the irony of not recommending a tick-box approach,
we think a key takeout is to go to page 21 of RG 255 (at paragraph
255.74) and work through the various testing methods in a similar
way that you would work though a checklist.
Key Takeout 3: Check your professional indemnity insurance (PI)
exclusions before you're excluded for cover when you most need
Some policies include sneaky or oft-missed clauses that carve
out key elements of a digital advice-provider's business. The
takeout: ASIC has helpfully provided 5 considerations on page 23
that you should look at in one hand, with your PI schedule in the
Remember also that if you are using an Authorised Representative
model, then your licensee will most likely be including you under
its PI cover, and you will need to talk to them about this.
Key Takeout 4: Benchmark your scoping tools against ASIC's
It's no surprise that a contentious element of digital
advice is how the robots can comply with the best interests
obligations, which include the best interests duty.
RG 255 confirms that it is ASIC's expectation digital advice
providers will comply with the best interests duty, unmodified.
Digital advice providers are also expected to have in place the
appropriate mechanisms to ensure that potential customers who are
not suitable for the service are "triaged" out.
In particular, it is necessary to have in place systems so
Any customer who asks for advice which is not provided by the
algorithm is filtered out;
Any customer who provides inconsistent answers is filtered
Also, providers who provide scaled advice must ensure that they
have detailed procedures to:
Explain what is provided (and what is not provided) by the
Ensure that the client is aware of the key concepts, risks,
benefits and costs associated with the advice;
Explain what dispute resolution processes are available to the
So, the key takeout is to go to page 27 of the RG and work your
way through 9 questions that ASIC poses, to test whether your
scaling process meets ASIC's minimum expectations.
Key Takeout 5: Implement an ongoing review process
AFSL holders are required by law to take reasonable steps to
ensure that their representatives comply with the financial
services laws. You also need to take reasonable steps to ensure
that your algorithms behave themselves on an ongoing basis.
ASIC includes 8 paragraphs of commentary on this point on pages
30-31 which should not be ignored. The takeout: Update your
existing monitoring and supervision processes in light of
By actioning the five takeouts in this article, you're five
steps closer to keeping yourself out of court and the hands of the
regulator. Good luck!
But, is it all too hard? As you have probably discovered as you
read this article, we have significant experience advising digital
advice businesses on their regulatory obligations, preparing
disclosure materials, and have helped many digital advice providers
stress-test and monitor their advice. We also train most of
Australia's banks, some of the larger financial planning dealer
groups, professional bodies and even some regulators on these types
of issues, so we can also run in-house training if you need us
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.
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