Hong Kong’s SFC says robo-advisers should provide info to clients on how algos operate
Information should be provided to clients on the limitations of the robo-adviser’s services and how and when the algorithm might rebalance a client’s portfolio.
The Hong Kong Securities and Futures Commission (SFC) has clarified its stance regarding the provision of robo-advice. Today, the regulator published a paper, summarizing the comments it received to its Consultation Paper on the Proposed Guidelines on Online Distribution and Advisory Platforms.
Market participants and interested parties are invited to submit comments on the further consultation or to comment on related matters that might have a significant impact upon the proposals by no later than May 28, 2018.
The paper, released today, sheds more light on how the SFC will oversee the providers of robo-advice.
In respect of the requirement for robo-advisers to provide information to clients including a description on how underlying algorithms operate and any limitations of the algorithm, one respondent commented that this will require Platform Operators to give away their trade secrets. Another respondent commented that such information should be limited to a broad, high level disclosure. Other respondents suggested that additional information should be provided, including the trade execution strategies employed by the robo-adviser and the options available if the investor wants to override these trading decisions, and how the robo-adviser charges for its services.
The SFC notes that it is important for clients to understand how investment advice is generated and how algorithms are used to manage their accounts. Information provided to clients should include the limitations of the robo-adviser’s services and how and when the algorithm might rebalance a client’s portfolio.
The SFC, however, does not expect platforms to go into the technical details of the algorithms. The focus of the requirement is that clients are provided with information which enables them to assess whether to use the services of the robo-adviser.
Disclosures must be clear and easy to read and overly technical terms should be avoided.
Another point of concern is the possibility of algorithms making errors and how to handle such situations. A respondent commented that putting in place controls to suspend the provision of advice or services in the event of an algorithmic error may not be necessary. A more practical approach would be to disclose situations under which the platform operator may override the algorithm (instead of suspending the provision of advice).
The SFC noted in its response that when an algorithm fails to work properly or as intended, service may be disrupted and investors may incur losses on their investments. That is why, the regulator expects robo-advisers to have in place internal controls to detect these failures, and halt trading if necessary. Robo-advisers should decide whether it would be in the best interest of clients to override the algorithm or even suspend trading activities.
Recent research has shown that whereas Hong Kong banks embrace new technologies, including AI-based chatbots, many small and medium-sized brokerages, which account for the bulk of Hong Kong’s licensed securities dealers, have no plans of using such technologies. The reasons for this reluctance are multiple but expenses are on top of the list. Among those brokerages that do not plan to deploy chatbots, 67% said the reason for staying away from chatbots was the excessive cost. For 28% of these reluctant companies the reason for shunning AI-based chatbots was the belief that human agents could not be replaced by machines. Possible legal issues also featured among the reasons.
