A Legal Framework for Robo-Advisors

Abstract

comunicación estudia los diferentes planteamientos de política legislativa acerca del fenómeno de la robótica e inteligencia artificial aplicada a la gestión patrimonial, lo que abre un nuevo campo de estudio en el derecho mercantil, sobre aspectos tan relevantes como su naturaleza jurídica y el régimen de responsabilidad y supervisión.

The aim of this paper is to offer a clear and a broad framework to allow better understanding of the current legal situation on Robo-Advisory, as well as, imminent future developments of algorithmic trading in financial markets. Robo-advisors are a response to a more complex wide-ranging set of services and instruments offered in financial markets. On the one hand, because of this complexity: new legal requirements had emerged in the financial sector (i.e. MIFID 2 and Basel III) and these requirements could be easily accomplished by non-human advisors and managers (robotics). On the other hand, robo-advisors represent an absolute competitive advantage for their users and financial institutions, considering big data analysis and management regarding both, their clients and their products information. Robo-advisory is a response to the complexity that is already allowing two functions for its users: on the one hand, it allows to comply with the legal rules (compliance) and manage a greater number of clients in an increasingly complex environment. Other market players, without robotics (and its applications in algorithmic trading) will not be able to comply with the new legal rules at this level since the current and future financial regulation in what insists most is in knowing very well the own clients and the products advised or managed (information duties, transparency, suitability and convenience test, customer profiling etc.). The other advantage of robo-advisors is to take advantage of economies of scale (because they can manage thousands of customers with thousands of products, assets and portfolios) and because of the algorithmic trading they can turn the financial business into a low-cost model with a more accurate level of legal compliance. However, even though robo-advisors solve many problems and improve market efficiency, they introduce new risks and regulatory challenges that are not being adequately addressed. Consequently, it is necessary to think about an optimal legal framework for robo-advisors based on two aspects: the adoption of legal entities for them, according to their operations; and an effective control of the management of data and risks, since otherwise we could attend a scenario of new systemic risks through the algorithmic trading performed by these smart machines, software and digital technologies. In this paper, we will analyze Robo-Advisory from the legal perspective, as one the determinant uses of Robotics (robolaw), Artificial Intelligence (AI) and digital technologies in the financial sector. The aim of this work is to delve into some legal challenges that the application of robo-advisors entails and the different normative approaches that we can find for the improvement of the current legal framework of robotics in the financial sector. Legal implications as well as the shortcomings of these concepts and relations are discussed.