Note: This article was written based on the Consultation Paper on Provision of Digital Advisory Services issued by the Monetary Authority of Singapore (MAS) on June 7 2017. It does not take into consideration any changes in law or other developments after August 8 2017.
In recent years, digital advisory services have been gaining popularity with the rising demand for quicker and more cost-efficient investment advice. Most digital advisers provide investors with easy access to investment advice and portfolio management services at a fraction of the price of traditional advisers or fund managers. This appeals to modern investors who are technology-savvy and who may not necessarily require contact with a human adviser or fund manager.
Digital advisory services involve the use of algorithm-based tools, and may come in the form of professional-facing tools which assist financial professionals in servicing their clients, or client-facing tools, which are also known as robo-advisers. Examples of roboadvisers that are available in Singapore include StashAway and Smartly, which provide customers with personalised investment portfolio services for a small fee, and either require minimum investment amounts that are lower than that required by traditional fund managers, or dispense with such a requirement completely.
Regulation of digital advisers under the existing regulatory regime and proposed changes
The advent of digital advisers has resulted in questions being raised as to the appropriateness of the existing fund management regulatory regime in Singapore, which was designed to regulate traditional fund management business models, in regulating digital advisory activities. While the traditional fund manager typically exists as a one-stop shop that provides customers with financial advice, fund management and trade-execution services, digital advisers operate under a range of different business models involving a selection and combination of the key activities carried out by traditional fund managers and, accordingly, may need to be regulated differently.
In this regard, MAS has, in a consultation paper dated June 7 2017 (Consultation Paper), proposed certain regulatory changes to facilitate the provision of digital advisory services in Singapore. These include, among other things, enlarging the scope of the exemptions from the requirement to obtain a capital markets services (CMS) licence under the Securities and Futures Act (Chapter 289 of Singapore) (SFA) to conduct the regulated activities of fund management and dealing in securities, as detailed below.
Enlarging the scope of licensing exemptions for fund management
Currently, licensed financial advisers conducting fund management activities that are deemed incidental to their advisory activities in respect of unlisted collective investment schemes (CIS) are exempted from the requirement to hold a CMS licence for fund management, subject to certain conditions. MAS has proposed to broaden the scope of this exemption such that it applies to both licensed and exempt financial advisers who manage portfolios comprising both listed and unlisted CIS in connection with their advisory activities (Proposed Fund Management Licensing Exemption).
In the same vein, the Proposed Fund Management Licensing Exemption would also exempt digital advisers which are licensed or exempt financial advisers from the requirement to obtain a CMS licence for fund management, when conducting portfolio rebalancing activities for portfolios comprising listed and unlisted CIS. Rebalancing activities are carried out to address portfolio drift by bringing the portfolios back to their original recommended asset allocation. Such activities are deemed as conducting fund management under the SFA, for which a CMS licence for fund management would be required unless otherwise exempted.
Further, MAS has proposed to dispense with the requirement for digital advisers to obtain prior approval of the client in respect of each and every rebalancing transaction, as is required under the existing licensing exemption. Digital advisers relying on the Proposed Fund Management Licensing Exemption would instead be required to obtain clients’ one-time acknowledgement of the terms of the discretionary portfolio rebalancing services, and to notify clients before each rebalancing transaction.
Enlarging the scope of licensing exemption for dealing in securities
Digital advisers who assist clients in the execution of transactions to construct and maintain recommended investment portfolios by passing clients’ trade orders to brokerage firms for execution are considered to be dealing in securities under the SFA, for which a CMS licence for dealing in securities would be required unless otherwise exempted.
In this regard, the SFA currently exempts licensed and exempt financial advisers from the requirement to hold a CMS licence for dealing in securities when assisting clients to subscribe for or redeem units in CIS. Noting that the risks posed by facilitating the execution of securities transactions are similarly low, MAS has proposed to expand the scope of this licensing exemption such that it applies to licensed and exempt financial advisers when assisting clients to transact in both securities or units in CIS, provided such dealing activities are incidental to their advisory activities.
Some clarifications required on the proposed regulatory changes
In relation to the proposed regulatory changes, an area that may require MAS’ clarification would be the applicable licensing requirements for digital advisers who do not, strictly speaking, provide any financial advice or recommendations. For example, the operating model of a digital adviser could solely entail the collection of information regarding a client’s investment objectives and financial situation, followed by its discretionary construction and management of an investment
portfolio for that client based on such information. In this process, the digital adviser is arguably not providing any financial
advice or recommendations to the client, but merely executes transactions to construct and manage an investment portfolio based on the information given by the client.
The Consultation Paper seems to suggest that all discretionary fund managers would require, in addition to a CMS licence for fund management, an exempt financial adviser status under the Financial Advisers Act (Chapter 110 of Singapore). However, arguably such an exempt financial adviser status should not be required if the digital adviser conducting discretionary fund management does not, strictly speaking, provide any financial advice or recommendations.
Separately, although MAS did not specifically mention this in the Consultation Paper, the existing exemption from the requirement to hold a CMS licence for dealing in securities, where the dealing activities are solely incidental to the carrying on of business in fund management, should, presumably, also apply to licensed and exempt financial advisers carrying on fund management activities in reliance on the Proposed Fund Management Licence Exemption.
It would be welcomed if MAS could confirm or clarify the above matters in its response to the feedback received on the proposals in the Consultation Paper.
MAS has indicated in the Consultation Paper that it welcomes the development of digital advisory services, and the proposed regulatory changes reflect MAS’ efforts to facilitate the provision of digital advisory services in Singapore. It is anticipated that these proposals could be further refined following the close of public consultation, and it remains to be seen what would be the eventual changes that will be made to the existing regulations.