• DA-2 DA-2 Algorithm Governance

    • DA-2.1 DA-2.1 Design of Algorithm

      • DA-2.1.1

        Licensees providing digital financial advice must ensure that the algorithm embedded within the client facing tool is sufficiently robust and that the algorithm is designed to sufficiently analyse the information in order to make a suitable recommendation. The algorithms must be able to identify and determine clients who are unsuitable for investing in products.

        Added: April 2019

      • DA-2.1.2

        Licensees providing digital financial advice must:

        (a) have appropriate system design documentation that clearly sets out the purpose, scope and design of the algorithms;
        (b) establish decision trees or decision rules as part of the documentation, where relevant;
        (c) establish controls to detect any error or bias in the algorithms;
        (d) have appropriate processes for managing any changes to an algorithm which must include security arrangements to monitor and prevent unauthorised access to the algorithm;
        (e) be able to control, monitor and keep records describing any changes made to algorithms (one way of doing this may be to store different versions of the algorithm electronically);
        (f) review and update algorithms whenever there are factors that may affect their relevance (e.g. market changes and changes in the law);
        (g) have in place controls and processes to suspend the provision of advice either when there are two or more conflicting answers to the risk profiling questions or when an error within an algorithm is detected and that error is likely to result in client loss and/or a breach of client agreement or laws and regulations;
        (h) have in place an appropriate internal sign-off process to ensure that the steps above have been followed; and
        (i) perform compliance checks on the quality of advice provided by the client-facing tool. This must include post-transaction sample testing.
        Added: April 2019

      • DA-2.1.3

        Licensees offering digital financial advice may base their algorithms on different methodological approaches (e.g. Modern Portfolio Theory). Each algorithm would have different assumptions, underlying rules and limitations. In addition, some digital advisers may override the automated algorithm or temporarily halt the digital advisory service in extreme market conditions.

        Added: April 2019

    • DA-2.2 DA-2.2 Testing and Updating Algorithms

      • DA-2.2.1

        Licensees providing digital financial advice must perform back-test to ensure that the methodology reliably produces an output that is consistent with the intended investment recommendation. Such back-testing must be performed at periodic intervals and when changes are made to the tool.

        Added: April 2019

      • DA-2.2.2

        Back-testing in Paragraph DA-2.2.1 refers to testing the digital financial advice tool that seeks to estimate the performance of a strategy or model if it had been employed during a past period. This requires simulating past conditions with sufficient detail.

        Added: April 2019

      • DA-2.2.3

        Licensees providing digital financial advice must maintain and document the policies, procedures and controls to monitor and test their algorithm. They must ensure that, at a minimum, the following process are in place:

        (a) have a documented test strategy that explains the scope of the licensee's testing of algorithms which should include
        i. test plans,
        ii. test cases,
        iii. test results,
        iv. defect resolution (if relevant), and
        v. final test results.
        (b) establish robust testing of algorithms to occur before digital financial advice is first provided to a client, and on a regular basis after that; and
        (c) conduct stress tests at least once a year under various scenarios including extreme adverse and unpredictable market conditions.
        Added: April 2019

      • DA-2.2.4

        Licensees providing digital financial advice must ensure that they have adequate human resources with the competency and expertise to develop and review the methodology of the algorithms.

        Added: April 2019

      • DA-2.2.5

        Licensees providing digital financial advice must not outsource the key processes and management of the client facing tool.

        Added: April 2019

      • DA-2.2.6

        Licensees providing digital financial advice may choose to outsource the development (based on the approach, methodology and design input provided by the licensee) and the day to day maintenance of client-facing tools to a third party. However, the licensee remains responsible for the underlying approach to financial advice, the methodology, design input and also the quality of the advice provided. In order to be able to assume this responsibility, the licensee must understand and control the rationale, risks and decision rules behind the algorithm. Licensees should, nonetheless, subject the outsourcing service provider to appropriate due diligence processes as required by the relevant rules on outsourcing in Module OM.

        Added: April 2019