How is Robo-Advice Regulated?

As with other financial service providers, the first step into the market will always be determining whether you need to obtain an Australian Financial Service Licence (AFSL) and then applying for the appropriate authorisations.

Sophie Grace understands that it is important to fully comprehend what our clients intend to do and as such, we will work with you to:

• Determine the correct authorisations for your robo-advice offering;
• Determine whether the nominated Responsible Manager is suitable to support your application;
• Prepare the necessary application documents for your business and lodgement with ASIC; and.
• Liaise with ASIC in relation to your application.

For further information on the service options to assist you with an AFSL application, please click here.

ASIC operates a regulatory sandbox framework allowing certain fintech companies to test specified services for up to 12 months without an AFSL. For certain digital advisers, this may be a good starting point. For further information please see our blog article.

Prior to Launch

Obtaining an AFSL does not mean that your business is ready to be launched into the market. ASIC expects digital advisers to conduct robust testing and monitoring of their system before launching their services, as well as on an ongoing basis.

We can work with you to:

• Document your testing and monitoring procedures; and
• Assist you in resolving any potential issues which arise from regular testing and monitoring.

Sophie Grace offers a compliance program for robo-adviser companies and will work with you to tailor these policies and procedures to fit your business needs.  Please click here for more information about our compliance programs.

What Happens if There is an Error?

Using an algorithm to provide financial advice does not shift the responsibility away from the provider to the algorithm or any third party – the entity that provides the financial services to the client remain fully accountable for any and all errors associated with the provision of financial services and bears the responsibility to remedy any consumer loss.

When an error occurs, robo-advisers should consider whether they will need to cease providing all financial services or some element of their service and proactively liaise with the consumer to address the issue. An assessment of the breach and a determination as to whether a breach report (“FS80“) should be lodged with ASIC must be made by the AFS Licensee.

Sophie Grace provides ongoing compliance services to various financial service providers in breach reporting, handling consumer complaints, AML/CTF obligations and so on. Please click here to read more about our ongoing compliance services.

Does the AML/CTF Regime Apply?

Yes, the AML/CTF regime will apply as robo-advisers are financial service providers that are considered reporting entities under the AML/CTF Act and Rules.  This means that robo-advisers will be required to identify their clients and verify their identity. The information required to be collected from clients is detailed in the AML/CTF Rules.  In addition, robo-advisers are required to report all suspicious matters to AUSTRAC, along with an annual compliance report which provides AUSTRAC with a self-assessment of the robo-adviser’s AML/CTF compliance throughout the year.

Depending on the business model and the nature of financial services to be provided, the transaction reporting obligations may vary. It is crucial for robo-advisers to understand their AML/CTF obligations, establish appropriate AML/CTF compliance program, which includes an AML/CTF Policy and Risk Matrix, carry out staff training and conduct regular compliance reviews of its implementation of the AML/CTF compliance program.

Other Things You Need to Consider

There are various aspects to establishing a robo-advisory business including:

• Preparation of the appropriate disclosure documents – robo-advice providers will need to prepare a client agreement to cover the terms of the engagement with users, a Financial Services Guide (“FSG“) and possibly a Product Disclosure Statement (“PDS“) (depending on the services you offer);
• Putting in place the appropriate data security;
• Developing remuneration structures which comply with the best interests duty and other aspects of the Corporations Act and Regulations; and
• Regular review of the AFSL authorisations to ensure the service delivered is covered under the AFSL. For example, if an automatic system will automatically adjust a client’s portfolio then authorisations in relation to Managed Discretionary Accounts (“MDAs“) will be required.

For assistance with all aspects of operating your robo-advisory business, please contact us.

Sophie Grace provides effective and practical guidance to new entrants to the market seeking to utilise robo-advice, as well as existing players, to assist you to operate within the regulatory framework.

We aim to provide innovative legal and compliance solutions to assist the following businesses:

• Financial Planners;
• Wealth Managers;
• Execution Only Businesses; and
• Other Fintech Businesses.