Post scriptum: regulation in automated investment management

Florian M Spiegl
January 28, 2017

My recent post on AI in Investment Management prompted a number of reactions and direct messages, some of which argue the role and impact of regulation in this space. One aspect is the provision of advice versus simple guidance and the regulatory implications around it.

Future models of automated Wealth and Investment Management will qualify as regulated advice.

As laid out in more detail elsewhere, an important debate is whether the activity carried out in Digital Wealth Management can be labeled as mere guidance or has to be classified as providing investment advice. The latter is firmly regulated in most jurisdictions, for example with the Securities and Futures Ordinance (SFO) and Type 4 SFC licensing requirements (and beyond) in Hong Kong or the Regulated Activities Order (RAO) and the Markets in Financial Instruments Directive (MiFID) in the UK. Wealth and Investment Management offerings comprising automated elements like portfolio construction and client communication via bots, as laid out in the original post, will most likely qualify as regulated advice.

What suppliers of automated services hence have to prepare for is that the same standards of regulation are to be enforced, irrespective of whether humans or machines provide the service. Following logically, also the same sanctions would apply for misconduct. This situation opens the issue of responsibility in case something goes wrong, quite similar to the questions we will have to answer in a society using autonomous vehicles. Who will be responsible for damages in the broadest sense: the programmer of the algorithms, the company operating it, even the user of the system that provides parameters, i.e., the client? This question also has relevance for the need and meaning of human involvement and hybrid setups in Digital Wealth Management.

There are interesting discussions ahead, particularly in the context of an industry headed for stronger collaboration between incumbents and young companies and the re-bundling of services to one-platform client offerings. We can expect the debate to revolve not only around client and revenue ownerships but also responsibilities and duties.

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