U.S. style robo-advisor services that incorporate little to no human involvement may not pass muster with Canada’s securities regulators.
The Canadian Securities Administrators (CSA) published new guidance on Thursday for portfolio managers that provide online advice — typically a low-cost service aimed at cost-conscious retail investors — that sets out the ways that firms can provide that advice while remaining in compliance with regulatory requirements.
The CSA stresses that the registration requirements are the same for all portfolio managers, whether they operate a traditional bricks and mortar model, or an online model. There is no “online advice” exemption, it says, noting that its rules aim to be “technology neutral.”
So far, the online advice platforms that have been granted registration in Canada “utilize an online platform for efficiency,” but also have registered advising reps (ARs) actively involved in decision-making, the CSA notice says.
“These platforms use electronic questionnaires for the know-your-client (KYC) information gathering process, but an AR is responsible for determining that sufficient KYC information has been gathered to support investment suitability determinations for a client,” the CSA notice says. “Often, model portfolios are created using algorithmic software although, again, an AR has responsibility for the suitability of each client’s investments.”
The CSA says in its notice that it “would need to carefully consider” whether a portfolio manager could fully comply with its regulatory obligations if it sought to use an online advice platform that is materially different from this model.
In particular, the CSA notes that the online advisors that have been approved in Canada are not the same as the robo-advisors that operate in the U.S., which have little to no human involvement.
Furthermore, the models that have been approved in Canada use relatively simple, straightforward products, the regulators stress: “To date, we have only approved online advisors with … relatively simple product offerings. We believe portfolios with uncomplicated asset-allocation models, made up of relatively basic ETFs or mutual funds, are readily understood by most investors and determining whether they are suitable for a given investor is a comparatively straight-forward exercise.”
The CSA recommends that firms contemplating either launching, or switching to an online advice model contact CSA staff at an early stage, “particularly if they propose to conduct them in a manner materially different from the model described in this notice.”
So far, regulators haven’t placed any added conditions on firms that operate online models, but that could change as firms try to innovate if their plans differ significantly from the models that have been approved so far.
“We will consider whether terms and conditions will be appropriate for different operating models as they develop over time,” the CSA notice says.
The regulators also note that their review of a firm’s plans for online advice will focus specifically on the firm’s KYC and suitability determination processes. Other areas of concern include reviewing the composition of the different investor profiles and model portfolios that will be used for clients, they say.