Asset management

Chinese regulators move to ensure ‘investment robots’ are not excluded from financial oversight

Inclusion of robo-advisers in the new regulatory framework reflects how watchdogs are keeping up with technology-driven financial innovations

PUBLISHED : Monday, 20 November, 2017, 7:17am
UPDATED : Monday, 20 November, 2017, 7:17am

The inclusion of robotic investment advisers in China’s regulatory framework for its US$15.4 trillion asset management business reflects how quickly watchdogs are closing regulatory loopholes when it comes to technology-driven financial innovations, analysts said.

In the new set of draft rules covering the country’s asset management market, top financial regulators have designated one of the 29 articles to robo-advisers, or artificial intelligence-driven programs that provide investment tips.

The move is part of sweeping new changes that will impact banks, insurers, brokers, and trust companies offering assets management products, whose combined value reached 102 trillion yuan (US$15.4 trillion) as of the end of 2016.

The tighter regulation of robo-advisers is expected to enable the orderly and healthy development of an emerging industry which could become mainstay of the finance industry of tomorrow, analysts said.

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“It is a forward-looking step from the regulators as they quickly learn the previous lessons of falling behind the curve when supervising internet financial companies,” said He Fei, a senior researcher at the Bank of Communications in Shanghai. “The regulations won’t stifle the emerging business. Instead, it is a necessary move to rein in risks and guide its growth in a proper way.”

Financial institutions are required to gain regulatory approval for such new services. They will also be required to disclose to regulators the algorithms, financial models, and logic used in asset allocations, according to the draft rules jointly released on Friday by the central bank, as well as the top banking, insurance, securities and foreign exchange watchdogs.

Financial institutions are also required to intervene if algorithms are found to be flawed or disrupt the stability of the financial market.

In mainland China, at least five banks have offered retail investors the option of using robots for investment advice, including the Industrial and Commercial Bank of China, the nation’s largest lender by assets.

“In the future financial institutions already testing the waters [on robo-adviser services], including brokers and commercial banks, are expected to gain a first-mover advantage in going through necessary procedures to gain licensing,” He said.

“We are quite optimistic about the growth prospects of robo-advisers, which are especially appealing to the nation’s tech-savvy emerging middle class,” he said.

Li Zichuan, an analyst from Beijing-based consultancy Analysys, agreed that regulatory guidance was a positive development for the hot but relatively new concept in China.

Li said it was understandable that regulations lag the market as authorities need time to gauge the impact of new innovations, but he added that regulators won’t be absent from the market.

Robo-advisers reduce the need for investors to visit the local branch of their financial planner for face to face advice, providing a cheaper way for the mass market to gain access to investment knowledge.

The value of China’s total robo-adviser services industry is expected to top 5.22 trillion yuan (US$783 billion) by 2020, according to data from Analysys.

The People’s Bank of China, or central bank, posted the draft rules to solicit public opinion on industry-wide supervision on all types of asset management products. While it is unclear when the new rules will take effect, regulators have already given financial institutions a grace period until June 30, 2019 before they must comply.