The Australian Securities and Investments Commission has issued a new regulatory guide regarding digital advice (also known as automated advice or robo-advice), the provision of automated financial product advice using algorithms and technology without the direct involvement of a human advisor.

The guide is based on the laws and regulations that are in place today and does not introduce new regulatory concepts. It contains examples of robo-advice that are purely for the purposes of illustration.

ASIC does not require providers of generic financial calculators to hold Australian Financial Services (AFS) licences that allow them to give financial advice. A generic financial calculator is a facility, device, table or other thing that is used to make a general numerical calculation or find out the result of a numerical calculation about a financial product and does not advertise or promote one or more specific financial products. Nobody is considered to be providing financial product advice if he only makes a recommendation or statement of opinion about the allocation of the funds among general asset types.

Digital financial product advice is generated by algorithms, so no human being is directly involved in providing the advice. Because of this, ASIC's 'training and competence' standards do not apply. For a digital advice licensee to meet the organisational competence obligation (one of the general obligations in s912(1) Corporations Act) in Regulatory Guide 105, it does, however, insist that the licensee should have at least one responsible manager who meets the T&C standards; its reason for wanting this appears to be technical conservatism. RG 105 (this guide is RG 255) is to do with proof of different combinations of training, qualifications and experience that make responsible managers skilful and knowledgeable enough to perform their (in this case non-existent) jobs. Much of the robo-advice guide is about how to apply for an AFS licence.

Invoking RG 104.85, and using the heading of 'human resources,' ASIC states that each digital advice licensee ought to ensure that there are people in his business who both understand the technology and algorithms being used to provide digital advice and are able to review the digital advice (generated by algorithms) itself. ASIC goes on: "We do not expect all digital advice licensees to understand the specific computer coding of an algorithm [but] we expect your understanding to include having people within the business who understand the rationale, risks and rules behind the algorithms underpinning the digital advice."

"We expect digital advice licensees to have robust compliance arrangements in place to regularly monitor and test the quality of digital advice provided to clients. This means that a sample of the digital advice provided should be reviewed by a suitably qualified individual for compliance with the law. This is consistent with our expectations for AFS licensees providing traditional financial product advice.

"The advice review process should not be a ‘tick-a-box’ exercise. We expect file reviewers to assess all the information and use their judgement in forming a view on the quality of advice provided. This may involve file reviewers considering any additional information, as appropriate, to form a view on the quality of digital advice provided."

ASIC does not say where its many 'expectations' come from. It goes on, however, to issue more, counselling robo-advice firms to start their business with frequent reviews of digital advice. When the firm makes any change to an algorithm, ASIC wants it to use a high degree of scrutiny and thinks that it would be prudent to test the quality of advice that the software is providing by means of 'scenarios.' The firm should also monitor and test algorithms through periodic (at another moment ASIC says 'regular,' so firms can take their pick) and random advice reviews.

Digital advice licensees are responsible for advice that does not comply with the law and should have procedures in place to identify and contact clients who have been provided with inappropriate advice. If an algoritm is found to be faulty, its removal or suspension is unlikely to be enough to rectify the problem. The firm may also have to send ASIC a 'breach report,' the ASIC term for a report in which a firm confesses to breaking a rule. Section 912D Corporations Act obliges the firm to tell ASIC in writing within 10 business days after becoming aware of any significant breach (or likely breach) of the terms of its AFS licence. It should also take additional steps to review the advice provided to clients if this advice might be defective. Again, ASIC mentions another of its many 'expectations,' this time stating that it wants all firms to remediate clients who have suffered loss as a result of defective advice.