Once new rules for robo platforms are finalised in Singapore, there is likely to be a big push from digital advisers into the mass-retail market, said Liew Nam Soon, managing partner for Asean financial services at EY. But there's a lot to be ironed out before that happens, he noted.
“You should expect more traditional players to set up offerings and also non-traditional providers to proliferate,” Liew told AsianInvestor. “Traditionally digital advisory does not get enough attention in the mass-retail space – the new guidelines should change this.”
The Monetary Authority of Singapore, the city-state's financial watchdog, is looking to make it easier for firms provide advice via digital channels such as robo advisers. It ran a consultation period between June 7 and July 7 seeking initial comments on its plans for a new regulatory framework.
Liew said the new rules would affect all those firms that aim to provide digital financial advisory services to the mass-retail segment – from existing financial advisers and fund managers to startups trying to provide self-directed advice through online channels.
“Fintech firms that are developing advisory services had been pushing for a framework like this, so the regulator is responding,” noted Liew.
“There are a number of robo advisers that are not part of larger institutions and so need clarity about what they can do, what licences they need and so on,” he added. “In some ways the MAS is catching up to what's already happening in the start-up space.”
Moreover, existing institutions want clear guidelines around the treatment of digital advisory services to help them decide whether to set up something on their own or acquire a robo adviser, said Liew.
“The regulator wants to be realistic in reducing the demands on asset and wealth managers looking to move into this area,” he noted, “but still needs to protect investors.”
Under the existing regime, service providers must obtain licences by demonstrating five to 10 years of relevant track record. The regulator proposes doing away with some of these requirements, but it wants to ensure that such businesses will operate effectively even in times of extreme market stress or volatility.
Achieving certain standards
But they will have to demonstrate a level of governance around the technology and how the business is run and the services are provided.
A key focus for the regulator is how the advisory algorithms will be implemented, noted Liew. MAS is consulting to see how much of the algo will be explained to the investor; it wants to be sure the algo is robust, the products it delivers are simple and the client understands sufficiently understands how it works.
The paper is in two parts, he said. One focuses on the algorithms for providing the digital advice and managing portfolios. MAS wants a deeper discussion on the governance around the software for offering investment advisory services and making the automated recommendations, noted Liew.
The other part of the paper relates to the governance of the business itself at the senior executive and board level – how it is managing the digital advisory business.
“The portfolio management aspect is probably the bigger issue,” he said. “For high-net-worth clients, this is not a new issue – but for retail investors, the question is how the algo will operate in times of a market crisis or major event, such as Brexit or the 2008 financial crisis; how it would work in terms of portfolio rebalancing. The MAS wants to able to understand how the platform would deal with it.”
Hong Kong, Singapore and beyond
Meanwhile, Hong Kong is also consulting on a framework for digital advisory services. Firms will presumably set up in Hong Kong if they want to target China and in Singapore for Southeast Asia, said Liew.
“This begs the question whether businesses would only set up in Singapore; it’s quite a small market,” he added. “There will need to be local regulations in other Southeast Asian markets as we are talking about the mass-retail segment, and it will be interesting to see how those develop.
“For big mass-retail markets like Indonesia, what frameworks will they put in place?" said Liew. "How they evolve could affect what business models providers put in place.”