As Abu Dhabi launches new regulations governing the digital asset management industry, the UAE capital is set to raise financial inclusion in the region through a better-regulated ecosystem for robo-advisory services, a fintech expert said.
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The Financial Services and Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) initiated a new governance and regulatory regime for robo-advisors as it aims to draw more digital asset management firms to its international financial centre and position itself as a regional hub for innovative financial technologies.
“The major benefit of robo-advisors would be increasing financial inclusion in the Middle East and Africa that lags in comparison to (the) worldwide average,” Mohamed Roshdy, a Dubai-based chief information officer and an advisor on fintech, told Zawya.
“Robo-advisors would play a great role for (people who) cannot afford to invest their money through the normal and costly channels, and their savings or wealth are little compared to what major investment companies accept,” he said.
According to the World Bank’s latest data in April 2018, 69 percent of adults worldwide – 3.8 billion people – have an account at a bank or mobile money provider. In the Middle East and North Africa region, however, only 52 percent of men and 35 percent of women have an account.
Robo-advisory platforms use artificial intelligence, machine learning and algorithms to offer financial advice to investors based on their willingness and ability to take financial risks.
“A robo-advisor is able to serve a mass of customers (at) low cost, (offer) better allocation of funds based on customer risk profile and ease of use. It is considered a game changer for (the) wealth management industry,” Roshdy said.
The Financial Services Permission (FSP), or licenses, announced by Abu Dhabi’s financial centre will allow digital investment management entities to have their own robo-advisor platforms. These platforms would offer their services either as a ‘fully digital model’ (i.e. have no human interaction with a client) or a ‘hybird model’ (where a client could interact with human advisors to discuss investments offered by the platform), according to Roshdy.
“The business model could vary from a simple model of advising clients on investments or credit up to managing assets on behalf of clients, where prudential capital requirement varies from $10k up to $250k between the simple model and the higher one,” he said.
According to ADGM’s statement, the FSRA will allow digital investment managers to hold a smaller amount of prudential capital should they meet the stipulated criteria and requirements, which is ‘in line with the FSRA’s risk-proportionate regulatory approach and framework’.
“One of the important features of these regulations is its emphasis on algorithm governance since it is the core component of the services offered by robo-advisors, where it is used to undertake critical and crucial components of the investment management process (risk profiling, portfolio allocation, etc.),” Roshdy said.
The FSRA said in its requirements that algorithms must be ‘closely calibrated to match international best practices and incorporate principles of fairness, transparency and accountability’.
Roshdy described the creation of a robo-advisory governing regime as “another important milestone by ADGM in its journey in positioning itself as an innovative regulatory fintech hub after they announced a framework to regulate digital currencies last year”.
Last year, ADGM launched a Crypto Asset Regulatory Framework, providing a set of rules governing spot trading of crypto assets by exchanges, custodians and other intermediaries based within its financial centre.
Assets under management in the robo-advisory segment reached more than $980 billion in 2019, according to global data platform Statista.
It expects the amount of assets under management by robo-advisors to grow at an annual rate of 27 percent to hit more than $2.5 trillion by 2023.
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