Technical Note No. 1/2022 - Clarification on Licensing Requirements for Persons Offering Digital Investment Advice

8 December 2022

The SC notes that the advisory business is growing and has attracted a lot of innovation in the ways in which advice can be provided to investors. One such innovation is the provision of advice digitally where algorithms are utilised by the providers to automate provision of advice, hereinafter referred as to as ‘digital investment advice’.

Digital investment advice unlike traditional investment advice is automated and leverages algorithm-based tools in interfacing with clients without the need to have direct human interaction.

The provision of digital investment advice is still ‘Investment Advice’ (IA) for the purposes of the Capital Markets and Services Act 2007 (CMSA) and as such carrying on a business of providing digital investment advice requires a licence from the SC.

However, the SC is cognisant that the business model used by providers of digital investment advice differs from traditional IA and as such, some of the current IA licensing requirements may not be applicable or suitable to digital investment advice. In this regard, the SC is working towards finalising a holistic framework that caters for both the ‘traditional’ and ‘digital’ advisory models.

Pending the finalisation of this framework, the SC is prepared to consider granting an applicant intending to undertake digital IA activity (DIA Applicant) a waiver relating to licensing requirements set out in paragraph 1 (a) to (c) of this Technical Note. A DIA Applicant intending to apply for such a waiver from the SC must submit its application with representations including its ability to satisfy paragraph 2 below which will be assessed by the SC in determining whether approval is granted or otherwise.

This Technical Note should be read together with the relevant Schedules in the CMSA and guidelines issued by the SC.

A. Entry Requirements
A DIA Applicant may apply for a waiver from the SC in respect of compliance of the following requirements:
financial requirements as set out in Table 1, Chapter 4 of the SC’s Licensing Handbook provided that the applicant has at all times a minimum paid up capital of RM200,000 and minimum net tangible assets of RM50,000 on admission and throughout the duration of the licence;
Bumiputera requirement relating to directors, representatives and employees’ composition; and/or
requirement pertaining to a licensed director provided that the applicant has at least a director who has a minimum of five years of relevant experience in investment advice and holds a Capital Markets Services Representative’s Licence (CMSRL) for investment advice.
B. Digital Value Proposition and Technological Competency
In regards to any application for any waiver set out in part (A) above, the DIA Applicant must demonstrate to the SC that it has –
a clear and meaningful value proposition for the target investors and any other target beneficiaries; and
has the necessary technological capabilities and governance structure including, but not limited to:
capacity and capability in formulation and implementation of effective algorithm tools in its undertaking of proposed DIA activities including understanding of the rationale, risks and rules;
the ability to identify and filter out investors for whom the DIA is not appropriate; and
having effective system and structure to support the digital investment advisory activities which includes maintaining a secure environment pursuant to the Guidelines on Management of Cyber Risk and other relevant guidelines.
C. Additional Requirements of a DIA Applicant
In granting a waiver, the SC may impose such requirements on a DIA Applicant as it deems appropriate which may include the following:
the governance and supervision of the technology and algorithm tools utilised and maintained in its digital investment advisory business; and
disclosure obligations relating to the algorithm technology used by the applicant.
D. Existing CMSL Holders Intending to Undertake DIA
Existing CMSL holders intending to undertake DIA must seek the SC’s prior approval. In granting such an approval, the SC may impose other requirements which it deems necessary in relation to the DIA activities. Such CMSL holders are also encouraged to consult the SC on the application to the SC.