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Risk In Context

Robo Advice Not Without Risk

Blog Author Andrew Dawson 31 August 2017

Providing financial advice online is becoming an attractive way for advisers to gain increased scale at a lower cost than traditional face-to-face services.

In Australia, robo-advice is starting to grow, with more than a dozen advisers expected[1] to be offering advice using algorithms to assess the best investment strategies for clients by the end of 2017.

However, questions remain about how best to take advantage of the opportunities created by robo-advice, and whether there is sufficient demand for such services.

Regulatory Requirements

The increased scalability and affordability of providing robo-advice, that has proved attractive for some advisers, has been boosted by the support of global regulators.

In Australia, robo-advisers need to have an appropriate Australian Financial Services Licence (AFSL) or be a representative of an AFS Licensee.

The Australian Securities and Investments Commission (ASIC) supports the development of a healthy and robust digital advice market, however, it has issued a specific guidance note (RG 255) which seeks to bring together some of the issues that face providers of digital advice to retail clients in Australia.

The Risks

Firms looking to provide robo-advice are typically faced with two choices:

  • Enlist a third party to establish and operate the service on the firm’s behalf.
  • Develop proprietary software and dedicate an internal team to running the service.

In both instances, ASIC has mandated several requirements within RG255 that seek to manage the risks inherent with this field.  Amongst other rules, RG255 notes that providers of robo advice must:

  • Be able to demonstrate they have adequate resources, including:

o   A resource within the business that has an understanding of technology and the algorithms used.

o   Capability within the business able to review the digital advice generated.

o   Sufficient resources to maintain client records, protect confidential information, and comply with all obligations.

  • Have adequate business continuity, backup and disaster recovery plans for any systems that support the delivery of digital advice to clients.
  • Ensure that when outsourcing functions that relate to digital advice:

o   There must be measures in place to ensure that due skill and care are taken in choosing suitable outsourced providers, and these providers will be monitored.

o   The licensee that outsources any functions must remain responsible for the financial services provided.

  • Establish and maintain adequate risk management systems and to have a structured and systemic process for identifying, evaluating and managing risks.

Importantly, ASIC has devoted an entire section of RG 255 to Cyber risks and information security, mandating amongst other things:

  • You are expected to assess cyber security using recognised frameworks, such as the National Institute of Standards and Technology’s Framework for improving critical infrastructure cyber security, or the Australian Signals Directorate’s Strategies to mitigate targeted cyber intrusions.
  • You must assess IT security arrangements against recognised standards.
  • You must have in place adequate security compliance measures in regard to cloud technology.

RG 255 reiterates the need for robo-advice firms to have appropriate Professional Indemnity (PI) and compensation cover, matching those set out for financial advisers in RG 126.

Insurance brokers have a key role to play in helping robo-advice firms to manage these risks.  Marsh can assist and provide a full range of services tailored to the financial services space, from consulting services on the risk frameworks and procedures via Marsh Risk Consulting, to structuring appropriate PI cover that complies with the requirements of RG126 via our FINPRO practice.

To understand more about how Marsh can assist you in managing these risks, contact your Marsh representative.

Disclaimer: This blog is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Marsh shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as legal advice, for which you should consult your own professional advisers. LCPA No: 17/0094.

[1] ETF Watch - 2016 Australian Robo Adviser Roundup

 

Andrew Dawson