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This article first appeared in Personal Wealth, The Edge Malaysia Weekly on May 15, 2017 - May 21, 2017

Consumers can look forward to new robo-advisory platform options soon with the introduction of the Digital Investment Management Framework by Securities Commission (SC) Malaysia. According to its press release on May 9, the framework aims to provide investors with a more convenient, affordable and accessible channel to manage and grow their wealth.

In a recent technical briefing, SC explains that a new category of portfolio management licence has been introduced under the framework. As part of the amendments to the Licensing Handbook,  applicants must satisfy digital value proposition requirements. They must fulfil criteria such as having a business model that demonstrates how digital innovations can deliver positive outcomes to its target investors and beneficiaries. They must also have a user-centric delivery, where services delivered to target investors and other beneficiaries must include a user-centric interface and experience, integrated investor education on the services offered to create greater confidence, trust and engagement and a transparent fee structure. Apart from that, applicants must also clearly demonstrate which part of the portfolio investment service components are automated, which must involve core components. Applicants may not be eligible if only limited parts or only non-core parts of the investment service are automated.

Digital investment management is a fund management business that incorporates innovative technologies into discretionary portfolio management services with little human interaction. An example of these services include robo-advisory platforms, which target the younger generation of do-it-yourself investors and those who are technologically-savvy and prefer having easy access to their investments at any time. By using algorithms, robo-advisers build a diversified portfolio for investors according to their risk profiles. These platforms, which typically invest in passively managed investments like exchange-traded funds, generally carry lower fees and affordable minimum investment amounts.

To reinforce investor protection, SC says in its press release that specific conduct requirements commensurate with the distinctive characteristics of this new business model have been set out. This includes the requirement for the board to be accountable for the governance of the digital investment management business by ensuring that the requisite technology capabilities are in place. This includes the identification of a competent person within the company who has sufficient understanding of the risks and rules of the algorithm applied. The board of directors must also ensure that the risk management framework is sufficiently robust to manage the risks associated with the offering of automated discretionary portfolio management services, including cyber security resilience. The outcomes produced by the algorithm must also be consistent with the digital investment manager’s strategy, along with having written policies in place to monitor and regularly test the algorithm employed.

The SC welcomes all applicants that meet the necessary criteria, whether they are new local/ regional entrants in the market such as start-up companies, or incumbents such as existing fund managers and bank entities.

Digital investment management refers to a fund management business offering automated discretionary portfolio management services. The framework is part of SC’s digital agenda for the capital market. Applicants who wish to offer these services may apply for the new licence effective May 9.

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