The Financial Markets Authority (FMA) has knocked backed suggestions the regulator is breaching its powers by fast-forwarding the robo revolution.
High-profile financial adviser, Murray Weatherston, said the FMA proposal released last week to allow personalised robo-advice tools prior to an impending law change “usurps the role of Parliament”.
Weatherston said while the FMA does have wide exemption powers, the current Financial Advisers Act (FAA) limits those exemptions to “compliance with any obligation” under the law.
“The key word is ‘obligation’,” he said. “My allegation that FMA’s is ultra vires [beyond the powers] in that a prohibition under the Act is not an obligation. Therefore it cannot be fixed by an exemption.
“An obligation is normally something you have to do when you are allowed to do something. It is not something you have to do when you are by law prevented from doing something.
“The issue is as simple as that.”
However, Liam Mason, FMA director regulation, said the financial sector overlord had investigated the limit of its exemption powers in detail.
“We were expecting to be challenged on the ultra vires issue – in fact, we were surprised it didn’t come up sooner,” Mason said. “But we’re comfortable we have the powers [to make the robo-exemption].”
He said the requirement under current law that personalised financial advice must be delivered by a human agent was a “negative obligation”, and therefore fit for a FMA exemption.
However, Mason said any exemption must be consistent with the FMA’s overarching remit, which includes fostering innovation without compromising consumer protections.
“We can’t do anything we like,” he said. “But we can use our power to remove the rigidity imposed by the law [banning robo-advice] that has created unforeseen circumstances.”
According to Mason, the June 21 FMA consultation paper is as much about asking “whether we should introduce the exemption as well as how we might do it”.
The regulator has proposed a class exemption for personalised robo-advice limited to “financial advice and investment planning” services within a defined list of products – including managed funds, KiwiSaver, listed securities, insurance and non-mortgage credit contracts.
Discretionary investment management services (DIMS) have been explicitly excluded under the FMA robo-advice proposals.
Mason said the approved robo-advice list was targeted to “highly liquid” financial products that consumers could easily exit on a “low regrets” basis.
He said the FMA had been approached by a large number of potential providers – from small start-ups to large institutions – keen to bring forward the exemption before the FAA replacement legislation, which is expected to formally legalise robo-advice by 2019.
Myles Allan, Mosaic Financial Services Infrastructure founding partner, said, the specialist IT consulting firm was also inundated with requests for information on robo-advice solutions.
Allan said Mosaic had already carried out extensive desktop reviews of over 20 robo-advice systems from both NZ and offshore while delving deeper into “two or three offerings”.
He said while some local institutions and start-ups were working on bespoke systems it should be “relatively straight-forward” for NZ firms to import proven offshore robo-advice technology.
“Robo-advice tools can just sit on top of existing infrastructure,” Allan said. “It should be easy enough for NZ institutions to adapt overseas-built systems but it all depends on the quality of the APIs [application program interface]… without them you’re going nowhere.”
NZ financial institutions looking to offer robo-advice would have to carefully weigh up the merits of outsourcing compared to building in-house, he said.
If the FMA exemption was approved, Allan said the NZ industry could probably switch robo-advice systems on quickly but the proposed focus on a limited range of financial products might exclude true “goal-setting planning systems”.
“In even the most basic of robo-tools it’s the goal-setting that gets people engaged,” Allan said.
Nonetheless, he said the FMA robo-advice exemption proposal could be “a good first step in encouraging innovation”.
Interested parties have until July 19 to lodge submissions on the FMA’s proposed robo-advice exemption.
Mason said, if approved, the robo-advice solutions should be able to go live before the end of this year.
“If we go ahead with the exemption we’re going to take some time to think about it,” he said. “It’s important that we draft it in a clear and useful way.”