Robo-advice: just advice, or is it a product?
Robo-advice is getting a lot of attention now, but online tools to assist in making financial decisions have been around in various forms for years.
Back in 2004, there was an investor website with a focus on US stocks. Subscribers could use it to search for stocks that met investment criteria. The website would generate recommendations on buying, holding or selling securities which met the criteria selected by the subscriber. The website didn’t enable the buying or selling of stocks: it only gave advice.
A financial services licensee promoted the website around Australia in seminars. ASIC took legal proceedings against it, claiming that it was providing financial services that were outside the scope of its licence. ASIC also alleged that the website itself was a financial product.
How could a website that gives financial advice be a financial product?
A ‘financial product’ is defined in the legislation as a facility through which a person makes a financial investment, manages financial risk or makes a non-cash payment.In the court decision handed down in 2005 (Australian Securities and Investments Commission v Online Investors Advantage Incorporated [2005] QSC 324), the judge said that the website was a financial product because it was a facility for managing financial risk. So the website was more than just a dispenser of advice about financial products (that is, US stocks): it was also a financial product itself.
What are the implications if a robo-advice website is a financial product?
First, the licensee would need to ensure that its AFSL authorisations were sufficient. By making the website available the licensee may be issuing a financial product, which means it would need an AFSL to deal in that financial product, not just a licence to give advice about other financial products. There are product-related obligations that could also apply such as giving a Product Disclosure Statement (PDS) about the financial product to a retail client before offering or issuing it, providing confirmation of transactions, and giving notice of material changes and significant events.
ASIC recent published a regulatory guide on digital advice (RG 255). It explains how robo-advice is regulated. A website that generates advice about financial products using algorithms is providing a financial service that will normally require an AFSL. However RG 255 only looks at financial product advice and does not discuss how robo-advice could also be a financial product.
Is the 2005 court decision still relevant?
It hasn’t been overturned. But websites that guide consumers in making financial choices aren’t a novelty anymore, so maybe these days there is less regulator concern about treating them like financial products. The regulatory approach should be clarified.
Patrick Dwyer
Legal Director