BaFin outlines its understanding of licensing requirements for investment advice rendered on robo advisory platforms
The provision of investment advice is generally deemed as being the provision of a financial service under the German Banking Act (Kreditwesengesetz, KWG) or the German Securities Trading Act (Wertpapierhandelsgesetz, WpHG) and therefore the person or institution who advises needs a licence according to Section 32 (1) KWG. Whether a license is needed is independent from the question if the investment advice is rendered personally (for example by a relationship manager) or via an internet platform (so called robo advice). Even if the provider uses a disclaimer as precluding the service offered does not qualify as investment advice, s/he needs a license because the disclaimer does not change the legal assessment whether investment advice is provided or not.
BaFin as the competent supervisory authority is in the position to examine whether a robo advisor fulfils the legal criteria of rendering investment advice. Therefore it is important to have a look on BaFin´s understanding of investment advice with respect to robo advisors.
What is investment advice?
Investment advice is legally defined as "providing customers or their representatives with personal recommendations in respect of transactions relating to certain financial instruments where the recommendation is based on an evaluation of the investor's personal circumstances or is presented as being suitable for the investor and is not provided exclusively via information distribution channels or for the general public" (Section 1 (1a) sentence 2 no. 1a KWG).
Normally, the (potential) investor will be asked several questions before the process enters into a final investment recommendation for the investor. Questions about basic personal information, information on the investment, or personal details will be asked and the investor has to answer them step by step.
In this respect it is important to know that BaFin points out that the prerequisites for providing investment advice are already fulfilled if the investor is asked for only personal information! This means that it does not matter how many questions the investor has to answer, but the quality of the questions. One question with respect to personal circumstances might be a question relating to, inter alia: (i) desired investment horizon, (ii) the amount the investor wishes to invest, (iii) information on the customer's age or (iv) risk appetite.
The exploration of the investor follows a personal recommendation. The personal recommendation can be provided by a robo advisor and does not necessarily has to be provided by a “real” relationship manager. It has to relate to transactions in specific financial instruments. The recommendation does not necessarily have to relate to the purchase of special financial instruments, it can also relate to the sale or to a hold of a special financial instrument the investor already purchased before.
In its article, BaFin emphasizes that when making its assessment whether the prerequisite of a recommendation is fulfilled or not, the naming of general product categories (such as, inter alia, "funds"), as part of an abstract suggestion is not specific enough for a recommendation. However, in this respect BaFin rather considers, for example, the number of available products as well as the granularity of a recommendation.
Usually, if a recommendation is provided solely through public information distribution channels, like the internet, it is not deemed to be a personal recommendation. But talking about robo advice: robo advice is usually provided via the internet. BaFin emphasizes in this respect that they deem any recommendation to be a personal recommendation as long as it is only made available to the one investor who uses the robo advisory platform to gain some advice on certain financial instruments. The argument that the recommendation is provided via internet cannot entangle in this situation.
Section 34f German Industrial Code
If the above outlined prerequisites are not fulfilled, the robo advisors might still need a license under Section 34f German Industrial Code (Gewerbeordnung, GewO) as intermediary for financial assets.
Since the question whether an authorisation is needed is subject to the specific circumstances of every single case, every provider of robo-advice should take legal advice on whether authorisation under Section 32 (1) KWG is required. Or if authorisation under in the meaning of section 34f GewO might be sufficient.
For companies who are planning to set up such platforms it also seems to be advisable to initiate a legal assessment of the planned services at a very early stage, so that any eventually needed authorisation might be acquired in due time.
For further details please refer to the Robo Advice Article on BaFin´s webpage, in English.