Taiwan aims to enhance investor protections against robo-adviser risks

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Taiwan’s regulator is aiming to strengthen investor protection against potential mis-selling and inappropriate investment advice from robo-advisers as take-up of artificial intelligence grows more widespread.

The move could see Taiwan become the first market in the world to regulate the algorithms that robo-advisers adopt to make recommendations.

Chang Tzu-min, deputy director-general of the Securities and Futures Bureau, in April said the authority planned to require industry participants to set up supervisory committees that include external experts to enhance investor protection.

Chang said Taiwan’s Financial Supervisory Commission would set up an external expert panel to review the algorithms to assess their ability to react to changes in the market and review whether financial groups could manipulate results generated by the algorithms.

He added that the FSC was currently in talks with the Securities Investment Trust and Consulting Association, which represents the local funds industry, over a range of such measures to strengthen supervision of robo-advisers to protect investor rights.

This also includes amending the Securities Investment Trust and Consulting Act to increase the maximum fine for malpractice by robo-advisers to NT$15mn ($480,000) from NT$3.6mn.

Liu Tsung-Sheng, chair of Sitca, said supervision from the regulator was needed because greater automation in the robo-advisory industry would “eventually become a trend”.

“If the investors are not satisfied with the recommendations provided by robo-advisers, or if such recommendations fail to comply with [know your client] or [know your product] principles, who should be penalised?” said Liu.

“If there are no regulations, should the robots or the fund companies be in charge?” he added. “Supervision from the regulator will improve the development of robo-advisers in the market.”

Taiwan’s robo-adviser market remains small compared with those in the US and UK, where the industry developed much earlier, but it could be one of the first to become directly involved in assessing the algorithms that are used.

The US Financial Industry Regulatory Authority currently requires companies to internally carry out initial and ongoing reviews of the algorithms employed by robo-adviser services. This covers the expected performance, reliability and sustainability of the algorithms when the market environment changes.

Hong Kong’s Securities and Futures Commission only requires robo-advisers to provide algorithm-related information to investors, including how and when the algorithm might rebalance investors’ portfolios.

Taiwan’s robo-advisory market has been growing rapidly in recent years after the FSC issued guidelines in June 2017 on providing securities investment consulting services with automated tools to open up the local robo-adviser industry. It has subsequently announced three waves of rule relaxation in the past few years, including allowing investment advisers to verify client identities online.

There has been a big jump in robo-adviser activities following a shift to online and passive investing. There were 16 Taiwanese financial companies providing robo-advisory services at the end of the first quarter this year, with total assets of NT$6.9bn, up 42 per cent year on year, according to FSC data. The number of investors in Taiwan using robo-advisers also increased by 17 per cent from the same period a year earlier to 167,000.

The three largest robo-advisers in the market are all run by banks. Cathay United Bank leads with NT$1.87bn in assets via its platform, Cathay Robo. It is followed by First Commercial Bank with NT$1.49bn and Hua Nan Commercial Bank with NT$698mn.

Quantifeed, a Hong Kong-based financial technology company, established a partnership with Cathay United Bank in 2018 and has built and powered the bank’s robo-advisory platform.

Alex Ypsilanti, Quantifeed’s co-founder and chief executive, said such tighter supervision was not likely to have a huge impact on the growth of Taiwan’s robo-advisory industry. The aim of the regulator, he said, was to ensure that robo-advisers’ activities remained transparent to end investors.

“I think what regulators around the world want to see is that the methodology is not a black box — it is explainable, transparent and reproducible,” Ypsilanti said.

But with the rapid development of AI, there are more efforts to introduce AI technology into the investment processes and advice engines of many robo-adviser platforms. Despite potential benefits in some areas, this is one reason why Taiwan’s FSC and potentially other regulators may look to increase supervision.

“There is a large role that these [AI] methodologies can play in digital wealth, particularly around customer engagement, including lead generation and acquisition,” said Ypsilanti.

“But when it comes to the part that is focused on making investment decisions, providing advice and managing investments, that’s where the transparency, explainability and reproducibility need to happen,” he said.

The FSC is also planning to set out guiding principles on the use of AI for the financial industry, details of which will be announced in a financial technology development plan to launch in August.

“Regulators would likely come down hard on elements of the advice engine that were not transparent or explainable,” Ypsilanti said. “You can’t tell the regulator that you have an AI model that advises the client what to buy without being able to explain its decisions at the same time and provide some form of auditability.”

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignitesasia.com.