The Monetary Authority of Singapore (MAS) today released a consultation paper on proposals to facilitate the provision of digital advisory services (also known as robo-advisory services) in Singapore. The proposals seek to support innovation in financial services by recognising the unique characteristics of digital platforms. Financial institutions currently regulated under the Securities and Futures Act (SFA) and the Financial Advisers Act (FAA) can already provide digital advisory services, and some have started to do so. More recently, MAS has also received indications of interest from new entities intending to offer digital advisory services to retail investors. The availability of digital advisory services will widen investor choice to low-cost investment advice. To make it easier for entities offering digital advisory services to operate in Singapore, MAS intends to refine the licensing and business conduct requirements.
First, digital advisers that operate as fund managers under the SFA will be allowed to offer their services to retail investors even if they do not meet the track record requirement, provided they meet certain safeguards. These safeguards include:
- offering diversified portfolios of non-complex assets;
- having key management staff with relevant collective experience in fund management and technology; and
- undertaking an independent audit of the digital advisory business within one year of operations.
Second, digital advisers that operate as financial advisers under the FAA will be allowed to assist their clients to execute their investment transactions (e.g. passing their trade orders to brokerage firms) and re-balance their clients’ investment portfolios in collective investment schemes without the need for an additional licence under the SFA. This licensing exemption will also be made available to non-digital advisers.
Third, digital advisers can seek exemption from the FAA requirement to collect the full suite of information on the financial circumstances of a client, such as income level and financial commitments, if they can satisfactorily mitigate the risks of providing inadequate advice based on limited client information. While facilitating new business models, MAS will require providers of digital advisory services to manage the new technology risks associated with these activities. Unlike conventional financial advisory services, the delivery of digital advisory services relies on the use of algorithms and online tools to analyse client data and recommend investment portfolios. As digital advisory tools may be susceptible to technology risks such as erroneous algorithms and cyber threats, MAS has set out expectations on the governance and management oversight to be adopted by digital advisers, including the need to put in place a robust framework governing the design, monitoring and testing of algorithms. This includes having adequate board and senior management oversight and compliance arrangements to monitor the quality of advice provided.
According to the consultation paper, the business model of digital advisers carries with it unique risks not posed by conventional advisers. Both professional and client-facing tools rely on data obtained through a distinct set of questions and algorithms to generate a recommended portfolio for clients. However, with limited or no human intervention in the advisory process, client-facing tools are susceptible to the risk of erroneous or biased algorithms that may not be in the best interest of the client.
In placing reliance on client-facing tools, the onus is on the digital adviser to ensure that the tool sufficiently collects and analyses all the information necessary to satisfy the requirements under the FAA. MAS will set out minimum expectations on the standard of governance and management oversight expected of digital advisers, including the responsibility of the Board and Senior Management for the monitoring and control of algorithms.
Under the Governance and Supervision of Algorithms section of the paper, it indicates that digital advisers principally interact with their customers, transmit, store and process customer information, and generate and deliver investment recommendations electronically. As such, it is imperative that digital advisers meet the expectations in MAS’ Notice and Guidelines on Technology Risk Management to mitigate technology risks.
For the monitoring and testing of algorithms, digital advisers are expected to have policies, procedures and controls to monitor and test their algorithms to ensure that they perform as intended. As a guide, digital advisers are minimally expected to have the following processes in place:
(a) access controls to manage changes to the algorithms whenever necessary;
(b) controls to suspend the provision of advice if an error or bias within the algorithm is detected; and
(c) compliance checks on the quality of advice provided by the client-facing tool.
Such checks should be conducted regularly and when there are changes to the algorithms. This should include post-transaction sample testing, and should be reviewed by a qualified human adviser to ensure compliance with the requirements under the FAA.
The full pdf copy of the Consultation Paper on Provision of Digital Advisory Services can be found here.
