Recognising the growth of digital advisory services (also known as robo-advisory services) and its differences from conventional financial advisory services, on 7 June 2017, the Monetary Authority of Singapore (MAS) issued a Consultation Paper on the Provision of Digital Advisory Services. In the Consultation Paper, the MAS sets out the licensing and regulatory framework applicable to digital advisers, proposes further legislative amendments to facilitate the provision of digital advisory services in Singapore, and sets out its expectations on how the unique characteristics and risks of digital advisory services should be addressed.
Applicable licensing and regulatory requirements
Generally, a digital adviser will be regarded as carrying on financial advisory services under the Financial Adviser's Act (Cap. 110) (FAA). However, depending on the specific operating model and activities carried out by the digital adviser, other licensing and regulatory requirements under the Securities and Futures Act (Cap. 289) (SFA) may also apply. For example, a digital adviser may be regarded as:
(a) Dealing in securities: if it offers a platform for the execution of securities transactions, including transactions that the digital adviser does not provide advice on; and
(b) Carrying on fund management: if it has discretion or control over clients' moneys or assets, including the operation of client omnibus accounts.
Subject to certain safeguards, the MAS proposes to exempt digital advisers from the additional licensing requirements under the SFA. For example, a digital adviser that simply relays clients' trade orders to a brokerage firm for execution after advising them, or who only has control over clients' portfolios to the extent necessary to rebalance such portfolios to their original recommended allocation, may not be required to be licensed under the SFA. The safeguards include requiring the digital adviser to assess its clients' knowledge and experience for transacting in certain types of products, to provide a risk warning statement to its clients highlighting the risks of investing in overseas-listed investment products, and to obtain its clients' prior approval for portfolio rebalancing.
Facilitating the provision of digital advisory services
To facilitate the provision of digital advisory services, the MAS proposes to:
(a) Relax the corporate track record requirement for retail fund managers: Currently, to apply for a retail fund management licence, an applicant must demonstrate at least a five-year corporate track record in retail fund management, and assets under management of at least SGD 1 billion. The MAS may waive such requirements where the key individuals of the applicant have relevant collective experience in fund management and technology; where the recommended portfolios comprise at least 80% traditional exchange-traded funds (ETFs) with a cap of 20% invested in listed shares/investment grade bonds and foreign exchange contracts for hedging purposes; and where the digital adviser undergoes a post-authorisation audit conducted by an independent third party at the end of its first year of operations on key risk areas; and
(b) Grant case-by-case exemptions from the requirement to collect full information on the financial circumstances of a client: Currently, financial advisers must obtain certain prescribed information in relation to their clients' financial circumstances. The MAS is prepared to grant exemptions from such requirements to fully-automated client-facing tools (i.e. digital advisers with no human adviser intervention in the advisory process) advising on traditional ETFs if appropriate safeguards are put in place to filter out unsuitable clients and reduce risk of mis-buying.
Expectations to address the risks arising from digital advisory services
The MAS observes that client-facing tools are primarily algorithm-driven and therefore a fault or bias in the algorithm would adversely affect all clients. Therefore, to address such risks, the MAS expects that going forward:
(a) Digital advisers must ensure that the methodology of the algorithm behind client-facing tools is sufficiently robust. This include performing sufficient back-testing to ensure reliability of output, performing gap analysis against technology risk management (TRM) requirements, and ensuring that they are adequately staffed with persons with the relevant competency and expertise;
(b) Digital advisers must have policies, procedures and controls to monitor and test their algorithms. This includes access controls to manage changes to algorithms, controls to suspend provision of advice if an error or bias is detected, and compliance checks on the quality of advice provided;
(c) Digital advisers must disclose to clients any potential or actual conflicts of interests, as well as reason for selectivity and limitations of recommendations provided. The MAS seeks views on the extent of information that the digital adviser should disclose on its algorithm to clients; and
(d) The board and senior management must maintain effective oversight and governance of the client-facing tools. This includes, approving the client facing tool design and methodology development as well as applicable policies and procedures, designating appropriate personnel to approve changes to algorithms; and ensuring that the requirements in relation to TRM are adhered to.
The MAS invites interested parties to submit their views and comments on the proposals and expectations above by 7 July 2017.