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Financial Robo Advice To be Cleared for First Time in NZ

11 May 2017

Financial Robo Advice To be Cleared for First Time in NZ: DLA Piper

The way will be cleared for robo advice to be given on financial investments and services in NZ for the first time, when the reforms of the Financial Advisers Act (2008) are complete. MBIE's consultation on a draft bill paving the way for robo advice closed on 31 March.

An original provision in the 2008 Act allowed financial advice to be given only by a certified ‘natural person’. The proposed changes remove that requirement.

“This legislative rewrite will open the door for automated, online investment advice to be given and for products to be automatically recommended that suit a person’s circumstances,' says Geoff Ward-Marshall, senior associate, DLA Piper. 'New entrants to the NZ financial advisers market are already eyeing up the opportunity. The International Organisation of Securities Commissions (IOSCO), to which NZ belongs, says that between 2015 and 2019 global spending on wealth management initiatives will treble from $4billion to $12 billion due to robo advice growth internationally. They attribute this partly to activity expanding in those countries where robo advice is already given, and partly to robo advice being offered in countries like NZ where it has previously been unavailable.'

'New Zealand will join countries like the USA, UK and Australia where robo advice on financial products is routinely available. Sites; (both UK) and (USA) are examples.'

The legislative changes will apply in NZ to financial services and investment advice of all kinds including insurance. In ‘robo advice’ an investor is typically taken through a list of questions which, through algorithms, enable the licensed financial adviser in control (an automated website or software) to recommend a product suitable to that investor's circumstances.

'The sets of questions might include those about your investment goals, your risk tolerance, and the amount you’ve got to invest,' says Mr Ward-Marshall. 'Based on your answers, the site would formulate an investment or portfolio of investments for you. It’s a recommendation of what you should buy. Depending upon the sophistication of service, it would make those investments for you. You just sit back.'

Many ordinary people could benefit, says Mr Ward-Marshall.

'At the moment there is a whole section of the market for small investors in NZ that are under-advised in their investment decisions. Financial advisers are typically most interested in those with more than $100,000 to invest. So robo advice could well suit those with less to invest,' he says.

'Under the current timeline, the law won't be changed until at least 2019. While MBIE and NZ's Financial Markets Authority will be scratching their heads for ways to expedite the reforms, the FinTech industry is fast moving and there is a real risk that New Zealand firms looking to operate in the robo-advice area will be left behind by their overseas competitors if the reforms don't happen sooner,' he says.

'When the law is finally changed, NZ’s Financial Markets Authority will need to provide guidance notes and regulation about the way robo advice will operate in this country.'

'In the Financial Advisers Act reforms there is nothing specific about the way robo advice will need to be given,' says Mr Ward-Marshall. “That will come later through regulation or guidance, as it has offshore. For instance, the service provider and website owner will need to be licensed as a financial adviser. That comes with its own disciplines and constraints. In addition, in Australia, they’ve focused their licence provisions on how financial advisers must ensure systems are robust, customer data is protected and cyber security is in place. A financial adviser offering robo advice in Australia needs to have human resources available who know what the algorithm is and does, how to monitor it, and that resource must ensure the algorithm has safety valves to catch anyone for whom robo advice is not appropriate. We can expect similar regulation in NZ.'

Mr Ward-Marshall says that once robo advice is fully implemented in law and regulation in NZ, it is likely existing financial advisers will team up with clever technology companies to provide it.

'What’s most likely is that alliances will develop between startups with robo technology, and established market players such as banks who have a ready customer base,' he says. 'They’ll be looking to deploy that technology fast and efficiently. Already we’ve seen the Kiwibank Fintech accelerator, which includes robo-advisory start-ups.'

'Aside from the need to have a compelling product or service, the keys to success for a FinTech start-up are obtaining capital to fund growth and developing a customer base - in the area of financial advice nothing will stop your funding and lose your customers faster than a sanction from the regulator. Staying within the regulatory framework will be of utmost importance to anyone commencing a robo advice service.'


About DLA Piper

DLA Piper is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific, positioning us to help clients with their legal needs around the world.

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