The disruption of robo-advisors in Nigeria as new market players in the financial sector is posing new issues for regulators in the short term. As a result, it is vital that regulators address certain critical factors in order to design and implement effective regulation of robo-advisory services in Nigeria.
The Securities and Exchange Commission (SEC) recently released its “Proposed New Rules on Robo-Advice Services” (the “Rules”), which indicates a step forward towards improving investments and financial services in Nigeria.
The application of digital technologies to all aspects of human life, the development of Robotics, AI, and Blockchain1 are being regarded as “the next big thing” due to the numerous possibilities that they imply for the future of the economy and its various sectors, particularly those relating to investment and financing.
Start-ups associated with digital financial advising and asset management, known as robo-advisors, are among the numerous disruptors through these innovative approaches to the economy that use modern technologies.
Robo-Advisory services are often taking a sloppy approach in Nigeria, as these robo-Advisors offer their clients with enough information to enable them to make informed financial decisions.
Robo-advisors have capitalized on many consumers’ skepticism of large banking corporations and are thus offering simpler ways to invest, usually by smartphone or through their websites, providing their customers with services accessible 24/7 at a low operational cost.
Fintech, or financial start-ups that use robotics and artificial intelligence, is increasing by the second in all regions of the world, generating new financial product and tools while always attempting to prosper and meet the demands of their clients. And in doing so, they are shaping the present and future of finance, and, eventually, the global economy.
The deployment of technologies in the regulatory and normative domains is a step further from these new financing opportunities. One of the key benefits that start-ups have over banking corporations is the relative absence of regulation, as compared to the extensive surveillance that banks face.
In this sense, so-called “Regulatory Technologies,” are intended to enable better and more efficient compliance processes, solving legal requirements in a more cost-effective and secure manner, and banks and other investment players have their sights set on these innovative solutions for their legal concerns.
The goal of this article is to provide a broad framework for a better understanding of the current legal situation of Robo-Advisory and to understand Robo-Advisory from a legal standpoint, while taking into account the “SEC Proposed New Rules on Robo-Advisory Services in Nigeria.
The Basic Meaning and Role of Robo-Advisors
The general definition of Robo-Advisers (also spelt Robo-Advisor) is that they are digital investment advisory platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. In a simpler language, a robo-advisor can been seen as an algorithm that provide investment services to an investor.
A typical Robo-Advisor collects information from investors about their financial situation and future goals and then uses the data to offer advice and automatically invest its client assets in stocks and other financial instruments.
Statistics released in 2020 showed that Robo-Advisors managed more than $460 billion leading analysts to predict that Robo-Advisory services will become a $1.2 trillion industry by 2024. This shows that Robo advisory is an impending sector.
Robo-Advisors offer investment advice for lower costs and fees than traditional advisory programs, and in some cases, require lower amounts to open an investment account with them than traditional investment adviser.
Reasons Behind The Emergence of Robo-Advisors
Robo-advisors are a response to the financial markets’ increasingly complicated and diverse collection of services and instruments. On the one hand, as the financial sector has become more complicated, new regulatory requirements have evolved, and their highly technical criteria can be easily met by non-human advisers and managers (robots).
When it comes to big data research and management of their clients’ and products’ information, robo-advisors, on the other hand, provide an absolute competitive edge for its users and financial institutions.
For both of these reasons, we can say that robo-advisory is a response to complexity that already allows its users to perform two functions: first, it helps them to comply with legal requirements (compliance) and manage a larger number of customers in an increasingly complex environment.
Other market participants will be unable to comply with the new legal regulations at this level without robotic support and its applications in algorithmic trading because existing and future financial regulation is based on knowing one’s own clients and the items advised or managed (information duties, transparency, suitability and conven-ience test, customer profiling etc.).
Second, robo-advisors benefit from economies of scale (since they can manage thousands of consumers with thousands of products, assets, and portfolios) and, thanks to algorithmic trading, they can transform the financial business into a low-cost model with a higher level of legal compliance.
However, while robo-advisors fix many present problems and improve market efficiency, they introduce new hazards and regulatory challenges that are not being addressed adequately. As a result, it is necessary to consider an optimal legal framework for robo-advisors that is based on two aspects: the adoption of legal entities for them based on their operations; and an effective control of data and risk management, because otherwise we could witness a scenario of new systemic risks due to the algorithmic trading performed by these software and digital technologies.
Regulatory Framework for Robo-Advisor in Nigeria
Whilst there is no specific regulatory framework for Robo-Advisor, however the Securities and Exchange Commission in its attempt to show the progression of certain aspects of the Nigerian Legal framework on financial advisory services published the “Proposed New rule on Robo-Advisory Services (the “Proposed Rules”)” marking the first regulatory framework for digital investment advisory services providers in Nigeria.
The SEC Proposed Rules for Robo-Advisory Service in Nigeria
Robo- Advisor is the first phase of larger regulatory frameworks that include digital assets, offerings and intercontinental, borderless trading on emerging securities.
It is a general rule that regulations are indispensable to the proper function of economies and societies. They create the “rules of the game” for citizens, business, government and civil society. They underpin markets, protect the rights and safety of citizens and ensure the delivery of public goods and services.
This is why the Security and Exchange Commission in a bid to match the global evolving investment tech ecosystem that is garnering a lot of following and usage, released its Proposed New rule on Robo-Advisory Services (the “Proposed Rules”).
The framework brings digital or “Robo”advisors under the regulatory purview of Securities and Exchange Commission (SEC), Nigeria’s apex capital market regulator.
The provision of the proposed Guidelines shall be applicable to all Capital Market Operators and persons (Individual & Corporate) offering or seeking to offer Digital (Robo) Advisory Services in the Nigerian Capital Market.
The Proposed Rules mandate that apart from complying with Rule 96 of the Securities and Exchange Commission Rules and Regulations, 2013, which provides for registration requirements of Corporate and Individual Investment Advisers, the Robo-Advisor is required to comply, on an ongoing basis, with all the applicable business conduct requirements set out in the Investment and Securities Act (“ISA”) and the Rules and Regulations, Notices and Guidelines issued pursuant to the ISA.
To avoid conflict of interest, “Robo” advisers are required to comply with the disclosure requirements on conflicts of interest set out in the Code of Conduct for Employees of Capital Market Operators as well as disclose in writing to their clients, any actual or potential conflict of interest arising from any connection to or association with any product provider, including any material information or facts that may compromise their objectivity or independence.
Although Robo-Advisory technology exists, there are varying degrees of human interface and influence on the functionalities of this novel technology. This appears to be the rationale for SEC’s decision to seek to hold humans accountable in the deployment of algorithm/artificial intelligence-based financial advisory services.
I also believe that the SEC believes Robo-Advisory services may soon be available to Nigerians with the plethora of wealthy tech companies in the ecosystem who are constantly innovating. Therefore, SEC may be seeking to create a regulatory environment in which Robo-Advisors can thrive and collaborate with the apex securities regulatory body in Nigeria to foster an adoption of technology-driven products by Nigerians.
It is pertinent to state that the disruption of Robo-advisors as new market players in the financial sector are bringing new challenges that the regulators must face in the short term. For this reason, at this time, it is necessary to delve into some key aspects that regulators should consider in order to create and implement efficient regulation of this new phenomenon:
– As regulators gain confidence in their capacity to assess and monitor robo advisors, and as robo advisors become a major force in the market, there may be less need for direct regulation of the forms and features of consumer financial products.
– Provisional ideas about how financial services regulation could facilitate quality-based competition and diversity among robo-advisors to ensure the performance of intermediaries who use robo advisors increasingly exceeds that of their unassisted competitors.
Ebunoluwa Bayode Ojo