Open-banking - comparing actual disruption with current models

There's a good article on open banking, by Rob Stock, on stuff - at this link. The article has a strong New Zealand angle too, which is unusual for such tech stories, and so is well worth a look. One thought that kept returning to me as I read it was how different actual disruption looks to current models. That's a sobering thought given the current state of innovation in the insurance sector right now. 

NZ financial product comparison: Pocketwise

A new NZ financial product comparison site compares KiwiSaver schemes, mortgages, credit cards and loans. Pocketwise is the name of the new site, which launched last month. View the site at this link and an article about their growth plans by David Chaplin from Investment News NZ at this link. Congratulations to Binu Paul and Richard Dellabarca on the new venture. 

Submissions Report on the Draft Exemption to Facilitate Personalised Robo-Advice

The submissions report on the draft exemption to facilitate robo-advice is well worth a read, especially the introduction, which shows that the FMA have taken the submissions into account and makes commitments to address the main issues. Assuming that those commitments are well-reflected in the actual regulations, this is a good example of the consultation process working well. Link

Robo isn't binary, it's both human and robo

Robo tools aren't either/or. The picture is sufficiently complex that in this article by Donna Fuscaldo at Investorpedia it is possible to argue that Millenials want robots, but also want humans. When you think about it, that's logical. No one seriously argues that a bank should be robo-only, or human only, banks are a complex stack of technology and humans. Investment is the same - and insurancee will be too. New Zealand's only experiment with a bank with no branches was closed a couple of years back. 

FMA Update: proposed exemption to facilitate personalised robo-advice

Rob Everett, Chief Executive of the FMA has provided an update on the progress on the draft exemption, indicating we can find out more in October. Also, I like that there is a defined approach to supporting innovation, and even in the absence of an exemption, or the changes proposed in the new Financial Services Legislation Amendment Bill, the FMA is approachable on this subject.

"I’d like to thank all those who responded to our recent consultation on a proposed exemption to facilitate personalised robo-advice. We had a large response to this proposal and are now considering all the feedback before finalising our policy in October.

The growth of fintech and emergence of innovative new products and services is not going to stand still, so neither should we.  Our approach to robo-advice reflects our support for new platforms, markets, products and services, and the fact that, ultimately, we’re here to help markets work well and businesses succeed. We operate in a flexible financial regulatory system and have the tools to respond to what the market is doing, rather than what it might have done five years ago. 

If you are developing an innovative new financial product or service, we’d love to hear from you as early as possible in the design process - this will help us to help you. You can read more about our approach to supporting innovation on our website."

Proposed Exemption to Facilitate Personalised Robo-advice - Code Committee Submission

The Code Committee Submission on the proposed exemption to facilitate personalised robo-advice is a very good document, well worth reading in full, with a highlighter in hand. Nevertheless, I shall quote some significant sections and add comments here, because the many good points deserve to be publicised and discussed. The Code Committee wisely avoids discussion of the merits of the FMA's proposed exemption, or power to grant an exemption, instead they stick to their role, which is to promote standards: 

"... the Code Committee’s position is that if an exemption is to be granted to facilitate personalised robo-advice then the terms on which any such exemption is granted must be consistent with the terms on which AFAs must operate and the purposes of the FAA consistent with the objectives of the exemption stated at page 13 of the Consultation Paper. This means exemption conditions must ensure that:

  • any personalised service provided through a robo-advice platform is subject to no less a set of minimum standards than would apply to an AFA providing a similar service;
  • permitting robo-advice is consistent with promoting the sound and efficient delivery of financial adviser services; and
  • public confidence in the professionalism and integrity of personalised robo-advice services and their providers is encouraged.

In our view, the above requirements are an absolute minimum. In granting an exemption to facilitate personalised robo-advice, the FMA must be confident that the level of consumer protection involved is no less than that which would be involved had the personalised service been provided by AFA"

You could argue one small piece of this, as a specialist in the field of insurance, for example, I have to speak up for the oft-neglected insurance sector. The current legislated standard for insurance is only that applicable to the Registered (but not Authorised) Financial Adviser, who is not actually required to meet Code standards - but rather the less well-defined section 33 of the FAA (and other law too, of course). But this would be a silly argument, we have a draft Bill which will bring insurance under a common set of Code standards shared by all financial advisers, so in practice I agree with the Code Committee on all the points above. In any case, the exemption draft is plainly aimed at investment business, and in such cases no quibbles should be possible. Robo-advice should meet current Code standards. If not, why not? The Code Committee proceeds to offer suggestions of the draft exemption paper: 

"The Consultation Paper does not provide any evidence that the FMA has taken any learnings from the experiences of those overseas jurisdictions into account in formulating its thinking. Given the likelihood that many of the personalised robo-advice platforms that will be made available to the New Zealand public are likely to comprise New Zealand applications of overseas platforms, we believe it would be helpful for the FMA to document its observations of those overseas experiences."

I expect that the FMA has considered other jurisdictions. I share the Code Committee's view that sharing what they have learned would be helpful. Perhaps we shall see that in some expanded commentary on the next version of the paper, or it could be released between now and then as a separate document to give context. The central part of the Code Committee's argument, however, is this:

The consultation discusses possible limits that might be imposed on the provision of personalised robo-advice if an exemption is to be granted. The limits discussed include limits
on the possible scope of any personalised robo-advice service that might be permitted, and financial limits. The Code Committee believes this is an inappropriate approach to take in the granting of any exemption. Either the provision of personalised robo-advice is consistent with the purposes of the FAA and is able to be delivered subject to the same minimum standards as apply under the Code, or it is not.

The emphasis is added by me. For the Code Committee, you should meet AFA standards, and if you do, there is no need for limits. This is the reverse of the FMA's apparent position, which we might infer as something like 'you cannot meet all the standards, so we will limit the risk'. But the Code Committee has firm feedback on the proposed limits on robo-advice on page 7 and 8 of the document: 

a) Limiting the scope of a robo-advice service in the manner proposed at pages 7 and 8 of the Consultation Paper is an approach we have not observed in any overseas jurisdiction
that currently provides for the regulation of robo-advice.

So it seems that the Code Committee has done some research of its own and finds no international validation of limits

b) The only limits placed on AFAs in providing personalised services are those driven by the AFA’s competency and abilities, as provided by the Code. A similar approach should apply to personalised robo-advice. 

There is a strong consumer protection argument here. Also, consistency with the law : competency is the standard used now, why not keep using it? Indeed, it isn't very confidence building for consumers to see a regime which could be interpreted as saying in effect, that small financial services contracts should not be subject to as high standards as large ones. Consumers with smaller investment funds, or smaller insurance needs, often depend on them far more than consumers with greater resources. 

c) The proposal that the exemption ‘would be limited to personalised robo-advice on products which are easy to exit’ is hard to reconcile with a product list that includes KiwiSaver and credit contracts. Even if limits on the possible scope of a robo-advice service were to be imposed, we believe that basing the filter mechanism on such a concept is ill-conceived.

Indeed, many of us in the insurance industry think we know what the writer of the report means when they put this awkward description of 'easy to exit' into the document. We suspect that what is intended is more like 'has less risks on exit', for example: I have asthma and dodgy knees. It is very easy for me to cancel my insurance, and very hard to get those conditions covered on the same terms. That, we think, is a problem the writer of the draft is not yet confident a robo-advice service could tackle. When we make our submission on the draft we will ask for clarification. 

d) Imposing limits on the scope of permitted robo-advice services is likely to undermine the efficacy of those services. In particular, by limiting the products on which personalised robo-advice services might be provided, it seems unlikely that robo-advice could ever be seen as a suitable option for the provision of investment planning services. Imposing any of the limits discussed would result in consumers accessing a more limited range of outcomes through robo-advice than would be the access if receiving services from an AFA, which would be a negative regulatory outcome.

Indeed, again. 

e) Placing any financial limit on either the value of a product or on the aggregate investments that might be advised on through a robo-advice service, would discourage investment in
the system necessary to deliver robo-advice services. Imposing such limits is likely to compromise the ability of a robo-advice service to reliably deliver suitable outcomes on a standalone basis, requiring human advisers (or self-help solutions) to plug the gaps, undermining the objectives of the exemption.

Although investments is not my main focus, I suspect that no robo-advice provider will be excited about the idea of their service being limited to just $5 million per year. That tiny limit provides almost no incentive for innovation outside the existing providers of funds. The only service that can be encourage is one offered by an incumbent fund manager. I am glad they will be able to do so, but I should like others to be able to do so as well. 

Separately I shall write on the issue of the proposed limits as they apply to life insurance, leaving them out of this post because the focus here should be on the Code Committee's work. Also, it is worth continuing to emphasise - creation is hard, criticism is easier. I am grateful for the work of the people that wrote this paper and recognise that the debate could not get to this point without it.

AI in Financial Services Today

Increasingly smart chatbots are making headway in the simpler robo-advice applications. FP Money reported on a series of bots. These are typically text windows which allow a browser on the site, perhaps using the site's main planning tools to examine the typical retirement issues, to ask questions. The text window, typing of the client, context of the screen and a broad library of answers allows even modest technology to provide a chat-like response. You may have used these and not even realised you are talking to a robot, especially if they are the sort of bot that has a human helping out behind the scenes.

You can tell if you experience something like this: an initial inquiry pulls a fairly chatty response 'hang on, I'll have a look' and then a suggested fix 'does this help...' followed by instructions. If you type something relatively predictable related to the instructions (like, 'where do I type that') then the bot can often respond again. But type a long question, 'no what I wan to know is...' and then you get a pause, this can be because the 'bot has given up, flagged the feed as requiring a human response, and now a human is actually typing the answer. 

Why don't we see them in insurance? Don't say this too loud, but insurance is actually more complicated than the linear goal of saving a pot of money for retirement. Although if we bring tax and income generation into the picture it is easy for retirement to get complicated too. 

Guide to Planning for New Financial Advice Regime

What rules might apply under a new financial advice regime? We suggest you take the following  documents as a whole to help you plan for the requirements for a Financial Adviser Practice: 

  • The draft law - the Financial Services Legislation Amendment Bill, plus the associated consultation document, fact sheet and FAQ. Link
  • The QFE Adviser Business Statement Guide - the current guide to application for the current equivalent of a FAP. Link
  • The Guide to the FMA's view of conduct - a new document, outlining expected conduct obligations. Link
  • The FMAs licencing overview document - brand new, and a good overview of expectations, especially covering governance, conduct, and professional development, and financial capability for licensed organisations. Link
  • Plus, of course, the current Code of Professional Conduct for Authorised Financial Advisers. 

The guide to conduct and financial capability indicate the latest development in thinking around effective supervision. Adviser businesses that wish to obtain a licence and continue to hold one would do well to get across these requirements now.

Considering them as a whole it appeared that we may be about to step across the threshold where licensing is sufficiently complicated that a new minimum business size is required (variable some-what with extensive outsourcing - but noting limitations the FMA expresses on that). That new minimum may see more adviser practice merger activity. Assuming it all comes to pass.

The breadth of the requirements may also herald a boost to the market for regulation-technology ('regtech') to help you manage it all. We have been busier than ever on the Quotemonster side of the business with advisers seeking to become more familiar with comparison processes and needs analysis.

If you like to have hard copies you can write notes on and have Post-it note tags sticking out of (like me), then you had better warn folks in the office before you send them all to print.