Robo-advice firms need to manage risks
While robo-advice could provide financial advisers with scalability and affordability, it is not without risk, according to Marsh Australia’s financial and professional risk practice, FINPRO.
In a blogpost by FINPRO, its national development leader Andrew Dawson said there were risks involved with two choices firms looking to provide robo-advice would have to make.
The choices were either to enlist a third party to establish and operate the service on the firm’s behalf, or develop proprietary software and dedicate an internal team to running the services.
“In both instances, ASIC [the Australian Securities and Investments Commission] has mandated several requirements within RG 255 [Regulatory Guide 255] that seek to manage the risks inherent with this field,” Dawson said.
Dawson highlighted that among other rules, under RG 255 robo-advice providers must:
- Be able to demonstrate they had adequate resources;
- Have adequate business continuity backup and disaster recovery plans for any systems that support the delivery of digital advice to clients;
- Ensure that when outsourcing functions that relate to digital advice:
- There must be measures in place to ensure that due skill and care are taken in choosing suitable outsourced providers, and these providers will be monitored;
- The licensee that outsources any functions must remain responsible for the financial services provided; and
- Establish and maintain adequate risk management systems and to have a structured and systemic process for identifying, evaluating and managing risks.
Dawson noted that on cyber risks and information security ASIC was mandating among other things that:
- You are expected to assess cyber security using recognised frameworks;
- You must assess IT security arrangements against recognised standards; and
- You must have in place adequate security compliance measures in regard to cloud technology.
“RG 255 reiterates the need for robo-advice firms to have appropriate professional indemnity (PI) and compensation cover, matching those set out for financial advisers in RG 126,” he said.
“Insurance brokers have a key role to play in helping robo-advice firms to manage these risks.”
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