The Capital Market Authority (CMA) of the Kingdom of Saudi Arabia has approved amendments to the Capital Market Institutions Regulations (CMIR) and the Glossary of Defined Terms Used in the Regulations and Rules of the Capital Market Authority (Glossary) to regulate the provision of Robo-Advisory Services, marking a significant development in the Kingdom’s fintech and capital markets regulatory landscape.
Scope of Application:
The regulatory framework applies to Capital Market Institutions (CMIs) that seek to offer Robo-Advisory Services in the Kingdom and sets out the requirements and conditions that must be met to offer such services.
Key Provisions:
Definition of Robo-Advisory Services:
A new insertion to the Glossary defines “Robo-Advisory Service” as “the use by a licensed Capital Market Institution of algorithms and modern technological tools to manage clients’ investments based on pre-determined investment strategies, with no or limited human intervention”.
Licensing Requirements and Conditions for Offering Robo-Advisory Services:
CMIs licensed to conduct investment management or investment management and fund operation activities may offer Robo-Advisory Services, provided that:
- the investments of the portfolio are not concentrated in a single asset or in securities issued by one issuer;
- in respect of services involving securities which are not issued or listed in the Kingdom, such securities must be subject to supervision of a regulatory authority that applies regulatory standards and requirements at least equivalent to those applied by the CMA; and
- appropriate disclosures are made on the platform through which the services will be provided regarding the role of the algorithms and mechanisms used in the delivery of the services and the associated risks, in a fair, clear, accurate, and non-misleading manner that is appropriate to the targeted clients.
Systems and Controls:
The Robo-Advisory Services framework mandates that CMIs establish appropriate systems and internal controls for their robo-advisory platforms. This includes: (i) control procedures for the algorithms and technological tools used; (ii) a risk management and monitoring policy; (iii) adequate and ongoing testing to verify the reliability and effectiveness of the algorithms and tools in relation to their intended purpose, and to ensure accuracy of the outcomes generated by them; (iv) independent annual safety testing; and (v) establishing and implementing mitigation policies for operational and technological risks.
CMIs must also ensure that they have, at all times, a registered person (registered with the CMA) to serve as the Information Technology Officer of the institution.
Disclosure and Transparency:
CMIs offering Robo-Advisory Services must notify the CMA of the strategies used in constructing and managing the portfolio (including any subsequent updates to these strategies) at least 10 days prior to offering these services to clients, and must comply with the specific requirements relating to disclosure, systems, and controls as set out in the CMIR.
Additionally, CMIs must provide clear and comprehensive disclosures to clients in their terms of business, which must include: (i) a clear description of the strategies employed in building and managing the investment portfolio; (ii) the criteria and methodologies for asset selection, asset allocation, and rebalancing the investment portfolio; and (iii) the operational framework of, and risks associated with, the algorithms and tools used in providing the services.
CMIs offering Robo-Advisor Services are required to disclose on their platforms the past performance of the specific investment portfolios managed through robo-advisory since inception. This disclosure requirement mandates the inclusion of the total returns after expenses, the criteria and methods used to measure performance, and any subsequent updates thereto. CMIs must also ensure compliance with the requirements under the CMIR pertaining to securities advertisements, including refraining from making any false or misleading statements relating to the services offered, accounting for the suitability of the services for the clients to whom they are offered, and setting out the applicable charges and fees.
Implications for Market Participants:
The approval of the amendments relating to the offering of Robo-Advisory Services provides a clear regulatory framework for CMIs seeking to expand their service offerings through technology-driven solutions. This development is aimed at expanding the scope of financial services delivered through modern technologies by providing investors (particularly individual investors) with greater access to innovative and effective investment advisory services.
Market participants holding the relevant CMA licences and intending to offer Robo-Advisory Services, as well as those currently offering such services, should review their existing systems and procedures to ensure compliance with the new regulatory requirements. Institutions considering the introduction of Robo-Advisory Services should engage with the CMA to understand the application process and ensure their platforms meet the prescribed standards for licensing conditions, disclosure, and controls.
If you have any questions or require further information on the new regulations or their implications for your business, please contact the key contacts.
Key Contacts
Rafiq Jaffer, Partner, r.jaffer@tamimi.com
Ambreen Bidiwala, Legal Director, A.bidiwala@tamimi.com