ASIC releases regulatory guidance for digital advisers - what you need to know

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.

Technological resources

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.
 

Jon Ireland

I constantly strive for technical excellence and commercial outcomes that add real value for my clients.

Jon Ireland Partner

Jon provides advice to leading Australian and international financial services clients on the full range of corporate, commercial and regulatory issues facing these businesses. He has considerable experience advising them on establishing, buying into, selling and restructuring their businesses.

Jon regularly advises on funds management issues including fund structuring, disclosure, investment management and outsourcing arrangements. He has particular expertise in the area of investment distribution and has advised on key projects for platform operators and advice providers.

Recently, Jon has advised on the establishment of a fully digital investment platform, the negotiation of a material outsourcing arrangement for a global investment bank and a scheme modernisation project for a leading Australian fund manager. Jon has also recently advised on the establishment of the Australian operations of a global diversified financial services business, including regulatory and corporate issues related to its expansion.

Jon's clients value his advice on recent law reforms, including around product disclosure statements and the digital provision of financial services. Jon is consulting to the Committee for Sydney and is a regular participant on Financial Services Council working groups.

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Kathy Merrick

Having the trust of my clients means we work together to achieve the best outcome.

Kathy Merrick Partner

Kathy has been called upon to advise on many of Australia's major corporate disputes, collapses and investigations. Her clients include major corporations and financial institutions, directors, officers, accounting and professional services firms, administrators, liquidators, other corporate entities and individuals.

Kathy has extensive experience in the areas of insolvency, directors and officers duties, professional negligence claims, and regulatory and other investigations, representing parties whether as plaintiffs, defendants, investigators or the subject of investigation.

Kathy is a strong advocate for pro bono work and has played a lead role in developing our community and pro bono program.

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James Higby

By collectively striving for excellence, we can achieve outstanding results for our clients and our Firm.

James Higby Senior Associate

James' focus is on commercial litigation including claims concerning allegations of inappropriate financial advice, shareholder disputes, directors and officers' duties, professional negligence, and corporate & regulatory investigations, acting for and against the regulator.

James has a keen interest in disputes arising from new technology, especially in the fintech area. He provides commercially focussed solutions to a range of clients in the financial services, government and private sectors.

James acts for listed and unlisted entities as well as major national and international financial institutions in a wide variety of proceedings in the Supreme Courts of New South Wales, Queensland and Victoria, the Federal Court of Australia and before the Financial Ombudsman Service. James is also experienced in government commissions and inquiries.

James has particular experience in relation to large-scale, high-value litigation, regularly acting for large institutions, their directors, officers or shareholders in all litigious matters including contractual disputes, tortious claims, trade practices proceedings, shareholder oppression suits and regulatory investigations.

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