Enhancing Investor Protections against Robo-Adviser Risks in Taiwan

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Taiwan’s regulatory body is taking measures to protect investors from mis-selling and inappropriate investment advice by robo-advisers as the use of artificial intelligence becomes more prevalent.

Taiwan may become the first market to regulate the algorithms used by robo-advisers for recommendations.

Chang Tzu-min, deputy director-general of the Securities and Futures Bureau, stated in April that the authority intends to require industry participants to establish supervisory committees with external experts to enhance investor protection.

The Financial Supervisory Commission (FSC) of Taiwan will create an external expert panel to review the algorithms and assess their responsiveness to market changes, as well as examine the potential manipulation of results by financial groups.

The FSC is currently in discussions with the Securities Investment Trust and Consulting Association to implement measures that strengthen supervision of robo-advisers and safeguard investor rights.

This includes amending the Securities Investment Trust and Consulting Act to increase the maximum fine for malpractice by robo-advisers.

Liu Tsung-Sheng, chair of Sitca, believes regulatory supervision is necessary due to the increasing automation in the robo-advisory industry.

Liu questions who should be held accountable if investors are dissatisfied with robo-advisers’ recommendations or if the recommendations do not comply with regulatory principles. He believes that supervision from the regulator will promote the development of robo-advisers in the market.

Although Taiwan’s robo-adviser market is smaller compared to the US and UK, it has the opportunity to participate in the assessment of algorithms used by robo-advisers.

In the US, companies are internally responsible for reviewing the algorithms used by robo-advisers, ensuring performance, reliability, and sustainability in changing market conditions.

Hong Kong’s Securities and Futures Commission requires robo-advisers to provide investors with information about their algorithms and how they rebalance portfolios.

Taiwan’s robo-advisory market has experienced significant growth after the issuance of guidelines by the FSC in 2017. Rule relaxations have occurred in recent years, and more Taiwanese investors are using robo-advisers.

Taiwan has seen a rise in robo-adviser activities, with 16 financial companies offering robo-advisory services and total assets of NT$6.9bn. The top three robo-advisers are operated by banks, including Cathay United Bank, First Commercial Bank, and Hua Nan Commercial Bank.

Quantifeed, a Hong Kong-based fintech company, partnered with Cathay United Bank and developed the bank’s robo-advisory platform.

Tighter supervision by regulators is unlikely to heavily impact Taiwan’s robo-advisory industry but aims to ensure transparency for end investors. Methods used by robo-advisers need to be explainable, transparent, and reproducible.

AI methodologies can play a significant role in digital wealth, particularly for customer engagement. However, transparency, explainability, and reproducibility are crucial when it comes to investment decisions and advice.

The FSC plans to establish guiding principles for AI use in the financial industry.

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