Key Takeout 2: Test algorithms and advice
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 it.
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 other.
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 minimum expectations
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 that:
- Any customer who asks for advice which is not provided by the algorithm is filtered out;
- Any customer who provides inconsistent answers is filtered out.
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 offering;
- 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 client.
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 ASIC's commentary.
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 to.
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.