Regulating robo-advisors : the role of fiduciary duties

Abstract

Financial market robo-advisors are computer systems that provide or support the provision of investment services, portfolio allocation and advice to investors. Consequently, they have generated concerns about potential risks they may raise for investors and financial markets. In particular, human finanical advisors have specific legal responsibilities to serve and protect their clients’ interests. These duties take a range of forms under both financial regulation and private law. In particular, human investment advisors have fiduciary duties to their clients under both financial regulation and private law. This thesis seeks to answer the main research question: Can fiduciary duties in the context of private law and financial regulation appropriately address the opportunities and risks presented by the development of robo-advisors? Can robo-advisors meet fiduciary duties in the same way as human investment advisors?

The first step of this thesis is to settle the basic question, “Can advanced artificial intelligence (AI) have legal personhood?” After passing the test of necessity, feasibility, and morality up to certain technical and rational standards, which is required to grant AI legal personhood, the thesis argues that robo-advisors should have the opportunity to obtain the legal status of fiduciaries due to the discretionary power they obtain when managing their clients’ assets if they meet the necessary requirements for legal personhood. Certain ethical requirements and compulsory insurance mechanisms are combined in the framework. However, for other less advanced robo-advisors, the institutions that develop, offer or use them should be restricted by fiduciary requirements.

Fiduciary governance has both private and public sides. Regarding fiduciary relationships, fiduciary duties, and fiduciary liabilities, the duty of loyalty and the duty of care are the core fiduciary principles from a private law perspective; nevertheless, different jurisdictions apply different approaches in interpreting and applying these principles. To make fiduciary principles easy to follow, these jurisdictions could learn from each other. From a public law perspective, as new risks and challenges occur with the application of AI-driven fintech products, regulators need to think about creating and updating prudent supervision regimes and generating the best innovation facilitators while also increasing their own use of technology for regulatory and supervisory purposes (Regtech and Suptech). Based on fiduciary requirements, financial governance of robo-advisors should confirm the principles applicable to robo-advisors, and adopt a proportional, pragmatic, prudential risk-based protective approach to investor protection and supervisory structure.

China and the United States adopt different approaches to the fiduciary financial supervision of robo-advisors. In China, robo-advisors have developed rapidly due to minimal market standards and regulations. DeFi (“decentralised finance”) robo-advisors, robo-advisors in traditional licensed institutions, and robo-advisors in startups face different dilemmas. Chinese regulators apply a financially inclusive strategy and penetrative supervision, but some of their regulations partially impede innovation. Although the United States has the most abundant robo-advisory products, it also faces noncompliance problems. With a basic framework of federal and state rules, the United States has established a comprehensive, autonomous, and economically efficient regulation system for fintech governance, yet regulatory uncertainty and fragmented organizational models still trouble both regulators and fintech institutions. With the ongoing development of robo-advisory products, both China and the United States must adjust their financial supervision approaches and try to explore a common supervisory governance approach to AI-driven fintech products.