Con­duct stan­dards must be tough­ened up.

Investment Executive - - FRONT PAGE -

In a world of big data, ma­chine learn­ing and ar­ti­fi­cial in­tel­li­gence (AI), the no­tion of dis­clo­sure and suit­abil­ity as the bul­warks of in­vestor pro­tec­tion grows ever more quaint and out­dated. As tech­nol­ogy in the fi­nan­cial ser­vices sec­tor grows pro­gres­sively more pow­er­ful, con­duct stan­dards must toughen up to match.

In­creas­ingly, tech firms are able to mine the vast quan­ti­ties of data that are be­ing col­lected on­line — largely without the knowl­edge or ex­plicit con­sent of clients — for con­sumer and mar­ket in­sights. Com­pa­nies that are at the lead­ing edge of AI can use these data to iden­tify and ex­ploit our bi­ases and be­havioural short­com­ings.

We all leave much more of an on­line trail than we know or un­der­stand. And com­pa­nies now are able to sift through these data and make judg­ments about who we are and how we are likely to be­have — with sur­pris­ing pre­ci­sion. In some cases, this en­ables firms to do good: com­pa­nies may be bet­ter able to iden­tify fraud, to pro­tect clients that might have had their iden­ti­ties com­pro­mised and to guard against bad credit risks.

But, just as eas­ily, this in­for­ma­tion can be ex­ploited — much like a fraud­ster would — to iden­tify “dumb money” and com­pile a list of suck­ers that can be tar­geted to sell high-priced, high-mar­gin in­vest­ment prod­ucts. Al­though this sort of tac­tic would cer­tainly be dodgy from an eth­i­cal per­spec­tive, there’s noth­ing in the rules to pre­vent it.

In this en­vi­ron­ment, dis­clo­sure can be as clear and forth­right as pos­si­ble, yet still serve no pur­pose. When com­pa­nies can a pri­ori iden­tify in­vestors that are un­likely to read or un­der­stand dis­clo­sure, reg­u­la­tors’ re­liance on dis­clo­sure to en­sure in­vestor pro­tec­tion is beyond use­less. If you think that com­pli­ance al­ready is lit­tle more than a box-tick­ing ex­er­cise — now the boxes can come pre-ticked.

So, rather than re­ly­ing on com­pa­nies to step back from the eth­i­cal fron­tiers that are be­ing cre­ated by the in­creas­ing power of tech­nol­ogy, reg­u­la­tors must step in and es­tab­lish con­duct stan­dards that pro­vide mean­ing­ful in­vestor pro­tec­tion. A clear, straight­for­ward “best in­ter­est” stan­dard should do the trick.

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