The Financial Services Regulatory Authority of the Abu Dhabi Global Market has issued a set of regulatory notes for Digital Investment Managers (also known as robo-advisors) that operate there.

Digital investment managers use algorithm-based hardware and software to provide the more technically adept of HNW clients with investment management services. Their technology allows them to tailor these services cheaply and do so on a grand or small scale. The FSRA sees them providing retail clients with a wider range of options than usual. To support their efforts, it has prepared some guidelines to show how its rules apply to robo-advisors and how they can operate more effectively in the market. For the purposes of the guidelines, digital investment management does not include asset management or advisory activities that rely on algorithm-based IT solely for the purposes of back-office support services.

The automated investment management services that robo-advisors provide include assessments of "suitability" (i.e. whether this-or-that product or service is suitable for the customer's needs), the modelling of portfolios and the rebalancing of accounts. If the robo-advisors follow a fully digital model, there is little or no human interaction with clients, beyond technical support services. If they follow a hybrid model, clients have the option to talk to a human financial advisor about the automated digital investment advice that the IT has already generated.

Some firms in the Gulf of Persia have developed digital investment management IT to "white-label" or sell to wealth management firms. If they operate solely as providers of technology, they are not considered to be Digital Investment Managers and do not require "financial services permissions," as the regulator calls its licences.

The core services provided by a robo-advisor typically involve the provision of:

• advice on investments or credit, perhaps by recommending that a client  ought to invest in a portfolio of financial instruments, or buy or sell particular financial instruments in order to rebalance his portfolio; and/or
• arranging deals in investments, for example by passing instructions with the client's consent to a broker to buy financial instruments on the client’s behalf; and/or
• managing assets; and/or
• holding assets through an agent as banker or custodian.

The guidelines outline the types of regulatory permission that a firm may require if it is to provide digital investment services in or from the ADGM, and the ways in which the FSRA will apply its "authorisation criteria" in existing areas such as "technology governance," suitability (rules for which are to be found in the FSRA’s Conduct of Business Rulebook or COBS) and disclosures, and newer areas such as "algorithm governance," a term that seems to relate to the setting-up of rules by which a firm allows itself to use algorithms. This might involve telling consumers how the algorithms work, or making staff accountable for their composition.

The FSRA’s requirements, with respect to algorithm governance, are closely calibrated to match international best practices and incorporate principles of fairness, transparency and accountability. These include requirements for:

• humans overseeing the design, performance and security of this-or-that model that an algorithm might follow;
• ensuring that the "algorithm model" cannot be affected by behavioural biases;
• adequate safeguards to protect the integrity of the algorithm model; and
• ensuring that at least somebody can explain why the algorithm model has led to various results and making those results traceable and repeatable.

Relief for digital investment managers who use RegTech

The FSRA will permit every robo-advisor to hold a smaller amount of prudential capital than usual should it meet various requirements. If, for example, it makes use of IT that makes it easier for the FSRA to supervise its activities, manage business risks or achieve better regulatory results, the FSRA might consider modifying or waiving prudential and other regulatory requirements. Applications for modifications or waivers will be assessed on a case-by-case basis and granted at the FSRA’s discretion.

Data protection

In view of their heavy dependence on collecting and processing clients' data and the deadly danger of cyber-attacks, digital investment managers must also evolve robust data security policies and systems to ensure compliance with all relevant data protection regulations, including the ADGM’s own Data Protection Regulations.

The regulator is not bound by the contents of its note in any way and indeed expects to change it at some stage, but it expects firms to follow its logic.