Singaporean regulator clarifies licensing requirements for digital advisors

The Monetary Authority of Singapore (MAS) has been making strides in facilitating the use of novel technologies in the financial services area. Earlier this year, the regulator said it was working on guidelines for artificial intelligence (AI) solutions use by financial institutions. Today, MAS published its Guidelines on Provision of Digital Advisory Services, which aim to facilitate the provision of these services in Singapore.

The guidelines are applicable to all financial institutions offering digital advisory services in Singapore.

Let’s note that the Authority defines digital advisers, also known as robo-advisers, as entities that provide advice on investment products through direct access to automated, algorithm-based tools to clients, with limited or no human adviser interaction. In contrast, conventional FAs may rely on similar algorithm-based tools at the back-end to help their representatives advise and service their clients.

Digital advisers operating in Singapore will have to be licensed for fund management, dealing in capital markets products and/or providing financial advisory services under the relevant Acts. The type of licensing depends on the operating model of the digital adviser. A digital adviser may also qualify for exemption from licensing, if it meets the relevant exemption provisions in the Acts.

Some digital advisers typically assist clients to pass their buy or sell orders (e.g. CIS, bonds and stocks) to brokerage firms for execution. The passing of such orders to brokerage firms for execution constitutes dealing in capital markets products under the Singaporean laws. However, MAS recognizes that the risks posed by facilitating the execution of clients’ buy or sell orders are low.

To allow FAs to provide better services to clients, digital advisers which are FAs are exempted from the need to hold a CMS (capital markets services) licence for dealing in capital markets products if they merely assist to pass on clients’ buy or sell orders to brokerage firms for execution, provided that such dealing is incidental to their financial advisory activities.

The regulator explains that dealing is considered incidental only if the digital adviser has provided advice to a client and subsequently assists the client to pass on the order to a brokerage firm for execution. The Dealing Exemption is independent of whether the specific recommendation is accepted by the client.

It is common for digital advisers to offer rebalancing of clients’ portfolios to address portfolio drift. This entails bringing the clients’ portfolios back to the most recent advice provided to the clients on the recommended asset allocation. This rebalancing of portfolios is automated and performed periodically.

Such portfolio rebalancing activities are treated as fund management under the SFA and persons who conduct such activities are required to hold a CMS licence in fund management unless otherwise exempted. However, MAS recognizes that there are merits to exempt digital advisers from holding a CMS licence in fund management to carry out rebalancing activities for portfolios that comprise solely of listed and unlisted CIS (“Fund Management Exemption”).

Portfolio rebalancing is considered incidental to the advice provided where it is solely for the purpose of aligning the portfolio back to its last recommended allocation as agreed or chosen by the client, and there is no change to the constituents of the portfolio. The scope of the Fund Management Exemption is limited to CIS as rebalancing of portfolios comprising individual securities requires FAs to advise clients on which securities to invest in, and the client’s consent should be obtained for this purpose.

Digital advisers relying on the Fund Management Exemption will be required to:

• (a) ensure that the rebalancing activity is carried out only for portfolios comprising solely listed and unlisted CIS;
• (b) obtain a one-time prior written authorisation from the client to periodically rebalance the constituent units of the portfolio;
• (c) provide a written disclosure to the client on the following, prior to obtaining the client’s written authorisation:

(i) the scope of rebalancing activities, including frequency and methodology of rebalancing;

(ii) fees payable and any other material terms and conditions associated with periodic rebalancing;

(iii) advance notice period that will be provided prior to carrying out any rebalancing activities; and

• (d) notify the client prior to each and every rebalancing transaction.