The Monetary Authority of Singapore (MAS) has issued new guidelines for firms offering digital advisory services. Digital advisers – also referred to as ‘robo-advisers’ – provide advice on investment products by giving clients direct access to algorithmically-driven automated tools with limited or no interaction with human advisers. The guidelines, which are set out in MAS’s document CMG-G02, Guidelines on Provision of Digital Advisory Services, address the licensing requirements and exemptions available for digital advisers, requirements pertaining to the governance and supervision of the algorithms implemented by a digital adviser, and related operational and compliance obligations.
As the Guidelines explain, the regulatory framework for digital advisers is the same as for conventional financial advisers. Depending on a digital adviser’s operating model, it may need to be licensed to deal in capital markets products, as a fund manager, or to provide financial advisory services. A digital adviser may qualify for an exemption from licensing as a financial adviser (FA) if it already holds a capital markets services (CMS) licence under the Securities and Futures Act (SFA) or if it is licensed under certain other acts, such as the Banking Act or the Insurance Act.
A digital adviser offering only basic advisory services would need to be licensed as an FA under the Financial Advisers Act, unless exempted. Under the Guidelines, an FA can offer certain incidental services that would ordinarily require a licence under the SFA without obtaining that SFA licence. For example, the digital adviser can pass a client’s orders to a brokerage firm for execution after advising them and can rebalance a client’s portfolio to be consistent with its most recent advice.
A digital adviser offering services that are not merely incidental to their advisory services would need other appropriate licences. For example:
For a digital adviser requiring a fund management licence, MAS has relaxed the licensing criteria relating to track record and assets under management if the digital adviser can satisfy certain safeguards relating to the qualifications of its key personnel and certain operating considerations.
Taking note that a digital adviser’s client-facing tools are based on algorithms, the Guidelines set out MAS’s expectations concerning the design, development, maintenance, and ongoing supervision of the tools, as well as staff training. The Guidelines make clear that the board of directors and senior management of the digital adviser remain ultimately responsible and accountable for the tools. Digital advisers will be expected to disclose to their clients certain key information related to their algorithms.
Finally, the Guidelines stress that digital advisers, like all financial institutions, will be required to implement policies and procedures to mitigate risks relating to money laundering and terrorism financing. Digital advisers must also take appropriate steps to mitigate technology risks and non-face-to-face business relationship risks.
The Guidelines became effective on 8 October 2018.
