The Financial Markets Authority (FMA) is going ahead with its proposal to carve out an exemption in the law to enable firms to offer personalised financial advice online.
However entities will have to wait a few months longer than expected before launching any robo-advice platforms, as they’ll have to get approval from the regulator first.
The FMA, in a consultation document it gave the public a month to respond to in June, said it aimed to have a “class exemption” in place by late 2017.
It proposed all entities that met the conditions of the exemption would be able to offer robo-advice.
Yet the feedback on the consultation document has prompted the FMA to take a harder stance and require firms to apply to use the exemption.
They will have to provide the FMA with good character declarations for directors and senior managers, as well as information showing they have the capability and competence to provide robo-advice.
The FMA’s director of regulation, Liam Mason, says this will give the regulator more “visibility” over the market. It will also ensure the standards robo-advice providers have to meet are consistent with that of human advisers.
In fact, the FMA says the exemption conditions will be designed so that robo-advice is provided in a manner that’s consistent with Authorised Financial Adviser requirements. AFAs are the most qualified type of adviser.
“The exemption conditions and our ability to monitor providers will help us to manage risks and ensure consumer protection safeguards are in place,” Mason says.
A matter of timing and commercial viability
The downside to increased oversight is increased complexity.
The FMA will have to go through another consultation process in November to draft the exemption notice and firm up what the application process will look like.
This means the exemption is only expected to be in place by early next year.
From there, Mason expects the FMA to take between one and three months to assess an application. It takes a similar amount of time to licence a human adviser.
Mason says the whole point behind the exemption is to give people access to digital advice as soon as possible, so the regulator will do everything it can to make this a “smooth and swift” process.
Nonetheless, firms will have to weigh up how commercially viable it is to apply to use the exemption next year, when the law set to replace the Financial Advisers Act and deal with robo-advice specifically, is expected to be passed in 2019.
While under the National-led government the goal was for the Financial Services Legislation Amendment Bill to be passed in May 2019, there are no guarantees the new government will keep moving ahead with this plan.
Mason says the feedback the FMA has received indicates the industry strongly supports the introduction of an exemption, albeit only valid for a year for example.
A number of the 49 submitters believe this would improve consumer access to advice, and say New Zealand can’t afford to fall further behind other jurisdictions in the sector.
Exemption conditions can’t be aligned with new advice regime
While some would rather sit tight and wait for a proper law reform, those who support the exemption would like its conditions to align with the new regime. They’re worried about incurring costs to comply with the exemption, only for these conditions to change when the new law is passed.
After all, a successful exemption application will not automatically get them a licence under the new law.
However with the new advice regime still being developed, the FMA says there’s no way it could align the conditions of the exemption with it.
Pressed on the matter, Mason recognises the Government is trying to get things moving. It has started working on the regime’s “Code Standards”, so they’re set up before the legislation is passed. But this process only began in July, after the FMA’s first consultation document on the exemption was released in June.
Scope of exemption broadened
Furthermore, the FMA has decided to extend the list of products firms will be able to provide robo-advice on to include personal (Ie life) insurance and mortgages. The others include KiwiSaver schemes, managed funds, listed equity securities, government bonds, listed debt, general insurance, savings products and other credit contracts.
Mason says the FMA believes there aren’t any additional risks providing advice on personal insurance and mortgages via a digital platform, compared to via a person. The risks are the same.
Finally, the FMA has decided not to impose financial limits on robo-advice. For example, an individual client investment limit or a limit on the total investment amount of products.
It recognises financial limits may be difficult to apply in practice or may have unintended consequences.