Let’s not tie up our robo-advisers in too much red-tape
ASIC’s new guide on digital financial advice must strike a balance between innovation and protection.
Increasingly complex Australian superannuation, tax laws and social security, coupled with low financial literacy and the general business of every day work and life, means that more and more Australians are making a greater number of important decisions without advice and guidance.
In fact, only one in five Australians seeks financial advice from a professional provider.
For some, negative stories around the quality and independence of financial advice is a barrier with the government addressing these concerns by legislating a significant number of changes to financial services law in recent years. These have increased consumer protection, upped transparency and banned conflicted remuneration. However, the affordability of quality advice and accessibility remain hurdles for many Australian consumers.
Robo-advice presents a potential solution for the 80 percent of Australians that don’t currently receive any professional financial advice. Broadly speaking, it can be defined as digitally provided algorithm-driven financial advice. This can take a wide range of forms. Early applications of robo-advice have been geared towards portfolio allocation and rebalancing, whilst next-generation forms incorporate rule engines and cognitive learning to turn client inputs into actual advice. All have one thing in common, they involve the use of digital platforms to improve adviser efficiency and productivity and the customer experience.
However, the government needs to ensure that both new entrants and existing financial advisers providing digital solutions do so in a manner that complies with our existing financial services laws. There is a fine balance between enabling higher standards of advice without inhibiting innovation. And, if we fall on the wrong side of this balance, we risk failing to deliver on the promise of affordable quality advice to more Australians.
ASIC recently issued a proposed Regulatory Guide, Providing Digital Financial Product Advice to Retail Clients for consultation to the market, requesting feedback from industry and interested parties how to regulate robo-advice.
The guide is a very welcome tool, offering useful guidance on how to provide digital advice within the framework of existing legislation for both traditional financial advisers and new entrants such as fintech startups.
That said, there are some critical gaps to address. The guide does not address what obligations must be met, if any, for alternative business models. This would include, for example, third-party fintech startups who provide technology or algorithm-only services to financial advisers.
Also, the guide as drafted could be interpreted as requiring all digital providers to fit the exact same business model of a financial planner. This could inhibit innovation which may deter some potential entrants and fail on one of the core objectives of the guide: facilitating a robust and healthy digital advice market.
In our submission to ASIC, KPMG Australia set out what we believe would assist find the right balance on regulating robo-advice at its current stage of development.
- Clarify the definition of digital advice and specify the various business models that are permitted within the current regulatory framework.
- Confirm the guide focuses on those robo-advisors providing advice directly to clients.
- Explain the obligations of third-party technology providers, who we believe are distinct from those of financial advisors working directly with clients.
- Include a list of all the regulatory guides that a new entrant to the industry should consider.
For digital advice to deliver on its early promise and bring solutions to enable advice providers to better service and advise their client or provide more Australian with financial advice directly, we need to foster innovation and encourage new entrants, new technologies and new ways of providing services. While customer protection should of course be top of mind for the regulator, striking a balance that does not inhibit or limit innovation will also be essential for the customer in the long run.
Read our full submission here.