ALRC inquiry puts focus on robo-advice

Following the completion of its Financial Services Legislation Inquiry, the Australian Law Reform Commission (ALRC) has outlined the possible options for legislation around robo-advice as well as some of the broader challenges involved with regulating amid technological advancement.

Legal officer at the ALRC, Dr Vanessa Ho, wrote that while these advancements can lead to new, more efficient business practices within financial services, the rapid pace can cause issues as the law attempts to keep up.

“This challenge is not new, and technology will continue to evolve in unanticipated ways,” Dr Ho said.

“The question then becomes, how can financial services legislation be reformed to best accommodate continually evolving technologies?”

She added that while legislation within financial services should be “technology neutral”, competing interests need to be weighed and it can be difficult to determine not just how new technologies should be regulated, but whether they should be at all.

“For example, the law aims to protect consumers without imposing burdensome regulation that has the effect of stifling innovation,” Dr Ho said.

“Three examples highlight the regulatory challenges of new technology: automated financial advice (commonly known as ‘robo-advice’); buy now, pay later (‘BNPL’); and crypto assets.”

Looking specifically at robo-advice, she said that despite some of the positives of the technology, such as making financial advice more affordable and convenient, with continual advancements in artificial intelligence, “robo-advice seems likely to become more sophisticated”, which may reduce the level of human intervention required.

“The existing legislative framework for financial services in Australia applies to robo-advice in the same way that it applies to human advice. This means that any weaknesses in the existing legislative framework would also affect robo-advice,” Dr Ho said.

“Throughout the Financial Services Legislation Inquiry, the ALRC has highlighted how financial services legislation is unnecessarily complex. The legislative framework contains excessive prescriptive detail, is difficult to navigate, and costly to comply with.

“This complexity is likely to be a deterrent for firms that have the technological capability to enter the robo-advice sector.”

The two options that the ALRC has put forward to reform the existing legislative framework to accommodate robo-advice are bespoke legislation geared towards robo-advice or reforming the current legislation and continuing to treat human and robo-advice as equals under the law.

“The main challenge with [bespoke legislation], however, is that robo-advice is still an emerging technology,” Dr Ho noted.

In particular, she noted challenges such as ensuring legislation is “drafted to be sufficiently technology neutral” to avoid redundancy as technology evolves, uncertainty that disincentivises firms from investing in robo-advice, and legislation being too prescriptive and needing a host of carve-outs and exemptions.

For the second option, Dr Ho pointed to the Quality of Advice Review and its recommendations that could help facilitate digital advice.

“Changes to financial advice provisions may be further supported by the ALRC’s reforms which aim to improve navigability and increase the adaptivity of the financial services legislative framework,” she said.

“A more navigable and adaptive legislative framework would facilitate the advancement of robo-advice technologies, and similar innovations, by making the legislation less costly to comply with.”

The ALRC delivered its final report of its Financial Services Legislation Inquiry to the government on 30 November.