On 30 August 2016 ASIC released Regulatory Guide 255: Providing digital financial product advice to retail clients. This new guidance helps digital advice providers with some of the operational issues in Australia, from the initial licensing stage through to the provision of advice. A selection of the key themes of the guide are below.
When an AFS Licence is required
Under the Corporations Act, you are required to hold an Australian financial services (AFS) licence, or to be an authorised representative of an AFS licensee, if you are carrying on a financial services business, unless an exemption applies.
Existing AFS licensees who want to provide digital advice will need to consider whether their current licensing arrangements enable them to do so. Startup Fintech businesses wanting to provide digital advice must apply for their own AFS licence or become an authorised representative of an AFS licensee.
If you are a startup who would like to become an authorised representative, ASIC has made some suggestions regarding questions you should ask the prospective licensee.
General obligations and RM requirements applying to digital advice licensees
All digital advisers must satisfy the general obligations in ss.912A and 912B of the Corporations Act. Those obligations include to do all things necessary to ensure that the financial services covered by the AFS licence are provided efficiently, honestly and fairly as well as to comply with financial services laws.
A key provision in the guidance is that ASIC will require a digital advice licensee to have at least one responsible manager (RM) who meets the minimum training and competence standards for advisers (i.e. natural persons who provide financial product advice to retail clients).
Complying dispute resolution system
A digital advice licensee should have an internal dispute resolution system which accords with the relevant rules and regulations and also be a member of an external dispute resolution scheme.
Regular monitoring and testing
A digital advice licensee should regularly monitor and test both the advice generated and the algorithms underpinning the advice platform. The adviser must engage people who:
- can review the advice generated to ensure it is appropriate and legally compliant; and
- understand the rationale, risks and rules behind the algorithms underpinning the digital advice.
A digital advice licensee should have sufficient technological resources to maintain client records and data integrity, protect confidential and other information and meet current and anticipated future operational needs, including in relation to system capacity. This includes having adequate business continuity, backup and disaster recovery plans for any systems that support the delivery of digital advice to clients.
The best interests obligations of the Corporations Act
Any adviser giving personal advice must satisfy the best interests obligations set out in the Corporations Act. For example, prior to giving advice the adviser is required to have identified the objectives, financial situation and needs of the client and, where it was reasonably apparent that such information was incomplete or inaccurate, to have made reasonable inquiries to obtain complete and accurate information.
A human adviser may do this by conversation. However, a digital advice platform will need to have a series of questions designed specifically to identify the objectives and needs of the client and to notice missing or incorrect information, followed by a series of questions in order to correct any deficiencies.
Failure to act in the best interests of the client is a breach of the Act and can give rise to regulatory interest in the form of a proceeding commenced by ASIC and civil claims by recipients of the advice.
How HDY can help
HDY acts for all types of financial institutions; ranging from the largest national and international banks to Fintech startups. We have significant regulatory expertise acting for and against the regulator, in litigious and advisory roles and we act in relation to financial advice disputes in all jurisdictions.
Please contact us if you require assistance with your licensing requirements and wish to discuss how the Regulatory Guide affects your business, if you are currently involved in a dispute or you wish to take steps to mitigate risk within your business.