ADGM’S REGIME FOR ROBO-ADVISORY — A WELCOMING MOVE TOWARDS FINANCIAL INCLUSION
The Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) recently issued its regulatory framework (“Framework”) for Digital Investment Managers (also known as “robo-advisors”). The Framework titled “Supplementary Guidance – Authorisation of Digital Investment Management (“Robo – advisory”) Activities” outlines various activities covered under digital investment management, related regulatory permissions required, conditions for significantly reduced capital requirement, and FSRA’s approach towards licensing criteria.
What is Digital Investment Management?
- Provision of investment management services using algorithm-based tools with optional or limited human interaction between clients and robo-advisors;
- Use of algorithms to provide automated services including suitability assessments, portfolio modeling, and account re-balancing;
- Operate on a fully digital model or a hybrid model wherein clients have the option to interact with human financial
Excluded from the scope:
- Investment management or advisory business model using algorithm-based tools solely for back-office support;
- Technology service provider developing algorithm-based tools to white-label or
The Digital Investment Managers require Financial Services Permission (FSP) from the FSRA to undertake any of the following regulated activity as part of their business models:
- Managing Assets
- Advising on Investments or Credit
- Arranging deals in Investments
Prudential Capital Requirement
Depending on the regulated activity, the minimum capital requirement is as under:
The investment product offering is limited to passive investment products such as ETFs and index trackers and must be liquid, non–complex and diversified Asset Managers which meet all the below criteria will enjoy the reduced capital requirement, i.e. the higher of USD 10,000 or 6/52 of the annual expenditure
- Discretionary management activities limited to portfolio rebalancing
- Do not hold client assets, instead, it must be held with an independent third-party financial institution under direct contract with the client
Key Highlights of the Framework
- Adequate governance and controls requirements for algorithms, technology, and data security
- Since the use of the algorithm is a core part of robo-advisory, consideration towards staff’s qualification and competency, development and testing algorithm’s model, managing, maintaining and ongoing monitoring of the model
- Suitability assessments undertaken through online questionnaire must be proportionate to the business model, complexity and risk
- Disclosure requirement in case of Retail Clients
The robo-advisory business model has been at a steady rise in the wealth management industry. It is a cost-effective and convenient way of providing tailored investments to affluent clients.
The Framework provides a pathway to make digital investment management activity easier to operate in ADGM as well as provide investors with greater access to professional investment tools to help achieve their financial goals.
The Framework is a welcoming move towards financial inclusion and reflects continuing initiatives and efforts of ADGM’s FSRA to develop and update the overall financial ecosystem
Robo-advisory poses different risks than those inherent in traditional investment management business models and hence, it is important for such businesses to have an appropriate governance framework and relevant education for the prospective investors and market intermediaries to make it a “success” story.