Malaysia has become the first country in ASEAN to license robo-advisors, opening the doors for Islamic and conventional investment managers to begin offering digital investment management services.
Approximately a year in the making, the Securities Commission Malaysia (SC) has finally rolled out its much-awaited Digital Investment Management framework, effectively regulating automated discretionary portfolio management services offered to the mass market.
“Several fund managers are eager to jump into the robo-advisory business and have been waiting for [the] SC to issue proper guidelines — with this, we can expect to see robo-advisors very soon,” an industry source tells IFN Fintech. Interested providers will need to apply for a separate portfolio management license and meet additional compliance criteria (See Table 1).
“To reinforce investor protection, specific conduct requirements that 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,” explained the regulator.
Robo-advisors are increasing in popularity in the Asian region: Hong Kong is currently seeking feedback on its proposed guidelines on online distribution and advisory platforms while Singapore is understood to be designing proposals on the governance, supervision and management of algorithms for robo-advisors soon. And while there are already robo-advisors in the region, none are Shariah compliant, making the SC’s framework significant in that it could pave the way for Malaysia, one of the most active Islamic finance markets in the world, to be the launchpad of Asia’s first Islamic robo-advisor. IFN Fintech understands that there are at least two providers looking at providing Shariah compliant online automated discretionary portfolio management services; so far Islamic robo-advisory services are offered by one provider in the US.
The SC’s move to regulate this area is driven by ambitions to widen the investor base, particularly by appealing to the younger, more digitally-savvy demographics, ie those below the age of 30, by allowing a greater range of investment products and services. According to the SC, less than 5% of this cohort participate in the capital markets. This follows the licensing of equity crowdfunding and peer-to-peer lending in the last two years which has yielded optimistic results: almost half (40%) of investors in equity crowdfunding deals are below 35 years old, which builds the case for the digital generation of investors.