1.
Introduction ^
Embedded in the Fourth Industrial Revolution [Schwab 2017] characterized by the application of digital technologies that affect all aspects of human life, the development of Robotics, AI and Blockchain1 are being considered «the next big thing» due to the many possibilities that they entail for the future of the economy and its many sectors, and in particular those regarding investment and financing [the economist 2015, Garvía/Sanz 2017].
2.
Some Reasons Beyond the Emergence of Robo-Advisors ^
3.
Some Basics about the Meaning and Scope of Robo-Advisory ^
4.
Horizons for a Robo-Advisory's Legal Framework ^
As a result of these new regulations, traditional financial services can be performed easier by robo-advisors. So, in our view, far from requiring new and specific regulation, robo-advisors could help in fostering compliance with newly developed financial regulation. For this reason, we advocate not to expand the amount of financial regulation but to clarify the current legal rules to allow a proper framework based on legal certainty for the introduction and effectiveness of robo-advisors. As previously argued, robo-advisors are giving to their users a competitive advantage that will lead them to manage a bigger number of clients, benefiting from economies of scale with a relatively low-cost business model. However, things are not as simple. A complete regulatory framework for the Fintech industry is still pending, as these technological innovations are growing fast and regulators cannot keep up their rhythm and changes [Garvía/Sanz 2017]. The case of robo-advisors is not different. In fact, the European Securities and Market Authorities recognized this lack of regulation and the need to establish a tailored regulation for Robo-Advisory [Esma 2015].
5.
Ideas about the Legal Forms for Robo-Advisors. ^
6.
Main Regulatory Requirements for Robo-Advisors ^
More control and supervision of Robo-Advisory sector would be desirable to strengthen the resilience of markets in the light of technological developments. In particular, one field to explore is to set specific measures and technical guidelines, issued by Esma, on systems and controls in an automated trading environment for trading platforms, investment services companies and competent authorities. In this sense, an European authority (Agency) in the field of Financial Robolaw would be a very desirable project in order to centralize and specialize the supervision of robo-advisors at the European level. It seems crucial and very necessary to ensure that all firms using algorithmic trading (whether they are financial institutions or investment firms, as users and owners of robo-advisors) are authorized, and report about the operations, clients and products of their robo-advisors or similar AI software for financial advice or asset management. Such authorization should ensure those firms are subject to organizational requirements under MIFID 2 and that they are properly registered and supervised.
In that respect, we endorse the MIFID 2 statement that Esma should play an important coordinating role, by defining appropriate tick sizes to ensure orderly markets at European Union level and ensure that market integrity is maintained in the light of technological developments in financial markets.
7.
Information and Data Management in Robo-Advisory ^
8.
Final Remarks on Legal Policy ^
With the implementation of MIFID 2, advising and asset management must be separated. For this reason, we suggest that independent robo-advisors (and also «robo-managers», i.e., AI computerized management) have now a significant opportunity for market expansion, so that regulators should focus on them as a matter of priority. Currently we face a lack of specific legal framework for the Robo-advisory sector. For this reason, regulators are called to satisfy this demand of legal certainty for financial market players, as it was acknowledged by Esma.
9.
References ^
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EY, Innovating with RegTech Turning regulatory compliance into a competitive advantage, EY Publications, 2016. Retrieved June 2017, from http://www.ey.com/Publication/vwLUAssets/EY-Innovating-with-RegTech/$FILE/EY-Innovating-with-RegTech.pdf.
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Kakavand, H./Kost de Sevres, N./Chilton, B., The Blockchain Revolution: An Analysis of Regulation and Technology Related to Distributed Ledger Technologies, October, 12, 2016. Retrieved June 2017, from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2849251.
Meola, A., These are the top financial services providers and fintech startups, Business Insider, December 22, 2016. Retrieved September 2017, from http://www.businessinsider.com/top-financial-services-providers-and-fintech-startups-2016-12.
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Schwab, K., The Fourth Industrial Revolution, New York, 2017.
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- 1 Uk Government Chief Scientific Adviser, Distributed Ledger Technology: beyond blockchain. Report, UK Gov-ernment Office for Science, 2016.
- 2 In addition to the several types of robo-advisors depending on the relationship between the user and the investor, we can find other classifications depending on the rest of roles. For example, regarding the degree of independence between the owner and the user, we can separate them into four groups that will require specific kind of agreements: Independent robo-advisor, Segregated robo-advisor, Integrated robo-advisor and robo-advisors that are used only as a tool for other users.
- 3 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.
- 4 https://www.bis.org/bcbs/basel3.htm.
- 5 See Introductory Paragraphs 70 and 71 of MIFID II.
- 6 We should add the key point of the liability in case of faulty advice, technical failures in the robo-advisor´s operating. There are some theoretical and hypothetical models of liability that might be applied to robots (analogies to minors or animals) but it would be advisable to develop a specific liability rules for them and for any kind of similar IA machines or smart financial software, in order to regulate them.
- 7 We take the meaning of algorithmic trading from Article 4 (Definition Number 39) of MIFID 2: «trading in financial instruments where a computer algorithm automatically determines individual parameters of orders such as whether to initiate the order, the timing, price or quantity of the order or how to manage the order after its submission, with limited or no human intervention, and does not include any system that is only used for the purpose of routing orders to one or more trading venues or for the processing of orders involving no determination of any trading parameters or for the confirmation of orders or the post-trade processing of executed transactions».
- 8 Moreover, all the existing legal entities shall accomplish MIFID 2 and MIFIR6 regulation, which in some cases are entirely applicable and in others just partially. In any case, robo-advisors should report back to the Supervisors and Regulators about their operations, instruments and clients (disclosure and transparency rules).
- 9 See Article 17 MIFID 2.
- 10 Legal requirements concerning robo-advisors and their databases depends on the type of information they are managing. If the information is related with their clients or investors, personal data protection and investor protection requirements shall be observed. If the information is related with the financial instruments under their control, then transparency, risk and valuation aspects should be considered.