Time is running out for financial services providers in Bahrain to give their views on a proposed regulatory framework for digital financial advice, or 'robo advice'.
The Central Bank of Bahrain (CBB) issued draft directives last month which, once adopted, would enable regulated firms in Bahrain to use technology to offer financial advice to customers in the country. Its consultation on the draft closes on 20 February 2019.
Financial regulation expert Marie Chowdhry of Pinsent Masons, the law firm behind Out-Law.com, said: "The release of this new consultation marks yet another milestone in the CBB's hard push to maintain Bahrain's position as a leading financial hub in the region."
"If adopted, the draft rules will set out the key requirements applicable to CBB licensees who wish to use a digital financial advice tool. Furthermore, if approved, the draft rules will allow fintech firms who focus solely on robo advice to obtain a regulatory licence from the CBB," she said.
The provision of financial advice is a regulated activity in Bahrain. The consultation seeks to put in place new rules governing the provision of digital financial advice within the context of prudential and conduct requirements. The consultation defines digital financial advice as "the advising on financial instruments using algorithms and technology and with limited or no human financial advisor involvement".
The draft rules set out in the consultation place an obligation on firms to record the extent of any client profiling undertaken as part of the provision of digital financial advice, on the basis that such profiling is critical to the algorithms underlying any client facing tool. They also set out the minimum requirements for firms seeking to provide digital financial advice.
Firms would be required to obtain information necessary to understand the client's overall financial situation, including: sources of regular income; financial returns objective; time horizon; liquidity; legal issues; taxes; and any unique constraints. They would also be required to obtain sufficient information to enable them to assess the customer's risk tolerance, capacity and willingness.
Processes must be put in place for resolving contradictory or inconsistent responses or advice in any client profiling tool or questionnaire, while firms would also be required to establish appropriate governance and supervisory mechanisms for the client profiling tool. They would be required to put a process in place to assess whether investing, as opposed to saving or paying off debt, is appropriate for that particular client; and to allow clients to be able to update and make changes to their profile at least annually.
As well as pre-contract disclosure requirements, the draft rules also oblige firms to make various ongoing disclosure requirements at different stages in the advice process. The consultation does not, however, specify how frequently such disclosures should be made, nor the extent that any disclaimer should explain the limitations or potential consequences of the scope of the advice provided.
Firms will be required to obtain a declaration from the client noting that the client understands the scope and nature of the digital financial advice provided, and the associated risks and limitations. Within this declaration, licensees are obligated to disclose any material information or facts that may compromise the digital tool's objectivity or independence and include a risk warning stating that the digital financial advice does not take into account the client's personal circumstances.