Reducing Legal Uncertainty and Regulatory Arbitrage for Robo-Advice

Abstract

Robo-advisers are online financial adviser services that use algorithms to create investment recommendations without human input. They deliver advice at low costs and they are growing in popularity. However, the nature of the interaction between client and machine raises many legal questions under the applicable EU regulation.

This article argues that robo-advisers provide investment advice within the meaning of the Second Markets in Financial Instruments Directive (MiFiD2). They are subject to authorisation by the national regulator and ongoing conduct requirements. It might be tempting to introduce regulatory sandboxes to address the persisting legal uncertainties in practice, but such a regulatory change does not seem likely in the near future. Instead, regulatory arbitrage should be reduced by a uniform application of the MiFiD2 framework throughout the EU.

Regulators and courts should also be aware that software replacing human advisers diverges from the basic idea of human interaction that forms the basis of contract law. Investment firms are able to use new technology in the services they provide. However, as this means introducing new risks for investors, the investment firm should be subject to a strict liability regime for failures of the respective technology (for example, the unavailability of the service).

Keywords: Robo-Advice, Robo-Advisory, Automated Investment Advice, Fintech, MiFiD, Regulatory Sandbox, Private Enforcement, Liability

JEL Classification: G23, G24, K22