The sudden boom in robo-advisory has prompted the MAS to consider regulating robo-advisory services.
In March, OCBC Bank, one of Singapore’s three biggest lenders, partnered with local financial technology firm Weinvest to launch robo-advisory services for investors. The bank said robo-advisory is no longer an industry buzzword, and its entry—along with the recent influx of other robo-advisers like Stashaway, Bambu, and Smartly. sg—prompted the Monetary Authority of Singapore (MAS) in June to begin consultations on how to regulate robo-advisory services. Legal experts explained the consultation paper looks not only to create an appealing regulatory framework for robo-advisers, but also to protect Singaporean investors.
What are the key points in the consultation?
MAS sets out the licensing and regulatory framework applicable to digital advisers, proposes further legislative amendments to facilitate the provision of digital advisory services in Singapore, and sets out its expectations on how the unique characteristics and risks of digital advisory services should be addressed, said Stephanie Magnus, principal, corporate & securities practice group and head, financial services & regulatory practice at Baker Mckenzie in Singapore. The agency is proposing two key processes to facilitate the provision of digital advisory services, said Magnus. First is to relax the corporate track record requirement for retail fund managers, possibly waiving requirements to demonstrate a minimum fiveyear corporate track record in retail fund management for digital advisers whose agents have relevant collective experience in fund management and technology. MAS also proposes to waive the requirements for certain portfolios that are heavily comprised of exchange-traded funds (ETFS) as well as digital advisers that go through an independent post-authorisation audit on key risk areas after its first operating year.
Second is to grant case-by-case exemptions from the requirement to collect full information on the financial circumstances of a client. “The MAS is prepared to grant exemptions from such requirements to fully-automated client-facing tools—or digital advisers with no human adviser intervention in the advisory process—advising on traditional ETFS if appropriate safeguards are put in place to filter out unsuitable clients and reduce risk of misbuying,” said Magnus.
In examining the current regulatory regime, the MAS has noted that the legislation needs to be reviewed to ensure that the safeguards remain relevant, said Siddhartha Sivaramakrishnan, partner at Herbert Smith and Freehills. Providers of digital advisory services would need to put in place adequate safeguards in order to manage the new technology risks associated with the algorithms and the online tools that such providers rely upon.
What legal safeguards is MAS looking to put in place?
Specifically, robo-advisers are expected to put in place a robust framework governing the design, monitoring, and testing of algorithms; hiring employees with competencies and expertise to develop and review the algorithm; and ensure these algorithms continue to perform as intended through the use of regular compliance checks and other policies and controls.
MAS is also seeking feedback on the extent to which the robo-adviser should disclose its algorithm to clients, including circumstances under which its algorithm may be overridden or its service suspended, and any adjustments to the algorithm, to protect clients in situations of actual or potential conflict of interest. With regards to accountability, MAS expects that the board and senior management of robo-advisers will be responsible in observing and maintaining these safeguards, and ensuring that their companies nurture a sound risk-management culture and environment.
How should the proposals be viewed?
The MAS proposals look to promote better access to digital advisory services and must be seen as a positive development as it keeps up with global trends, said Kim Kit Ow, partner, banking & finance group at Bird and Bird in Singapore. “To the extent that the requisite safeguards are built into our regulatory infrastructure, there is no reason why such an initiative should not be seen as a progressive step in the right direction,” she said. “We expect to see more developments in this space and we look forward to see how Singapore’s approach towards digital advisory services will evolve.”
The requirements to demonstrate a minimum five-year corporate track record in retail fund management for digital advisers may be waived.
Smartly.sg Smartly.sg is is one one the the robo-advisory robo-advisory platforms platforms that that launched launched in in 2017
Kim Kit Ow