The framework and its associated guidance (11 page / 705KB PDF) are designed to address the challenges associated with robo-advisers, which provide investment management services using algorithms and other technological tools, either through a fully digital platform or with some human interaction.
The regulations and guidance cover both fully digital and hybrid robo-advisers which provide advice or investment management.
Financial services expert Marie Chowdhry of Pinsent Masons, the law firm behind Out-Law, said: “The provision of automated advice poses significant challenges for regulators seeking to preserve the integrity of financial markets. The ADGM’s recent steps to regulate digital investment managers indicates the ADGM’s drive to address these risks head on and in turn provide investors with greater access to professional investment tools, as well as a degree of protection."
“This is another example of the ADGM turning its focus to the growing fintech sector in the region, and comes at the same time as the ADGM’s announcement that it will be accepting applications from local and international financial institutions for establishing digital banks,” Chowdhry said.
The guidance outlines the regulatory permissions that are required to provide digital investment services in or from the ADGM and how the FSRA will apply its authorisation criteria in existing areas of technology governance, suitability and disclosure, as well as newer areas such as algorithm governance.
The FRSA said it has used international best practice to draw up its requirements for algorithm governance. These include a requirement for human oversight over the design, performance and security of the algorithm model; ensuring that the algorithm model is not affected by possible behavioural biases; adequate safeguards to protect the integrity of the model; and ensuring the outcomes it produces are explainable, traceable and repeatable.
Robo-advisers which manage client assets, but meet three specific criteria, will be able to hold less prudential capital than traditional investment managers. These include limiting the product to passive, liquid investment products; the limit of investment management services to portfolio rebalancing; and not holding any client assets. Investment management firms meeting all three of these criteria will have a base capital requirement of $10,000, compared to $250,000 for other firms managing assets.
The FRSA has said it would apply controls outlined in its rulebook to all robo-advisers, irrespective of size. It said digital investment managers need to have adequate algorithm and technology governance policies and processes in place, as well as robust data security policies and systems.
Robo-advisers will also have to abide by suitability and disclosure rules as currently laid out in the regulator’s Conduct of Business Rulebook.