الهيئة العامة للرقابة المالية

•  Robo-advisors use algorithms to analyze client’s risk tolerance, investment goals, and financial situation to offer automated investment advice.
• The decision classifies portfolio management companies as providers of automated investment advice (Robo-advisors)
• Robo-advisors can form and manage investment portfolios that include securities listed on the stock exchange. They also regularly track and assess its performance.
  Robo-advisors use algorithms to generate automated investment advice based on client information.
  Only companies with a minimum capital of 15 million EGP and cybersecurity insurance can use the robo-advisor program.
  Companies are required to submit quarterly reports to the Authority. These reports should assess the program’s performance and its outputs. This data helps ensure the program can continue delivering services effectively.

FRA issued decision no. 57 of 2024 to regulate Robo-advisors. The decision allows Portfolio Management Companies for the first time to provide automated investment advice for stocks traded on the Exchange. This decisions was issued in continuation of the Authority’s ongoing efforts to introduce new products to the market that enhance its competitiveness, promote the use of financial technology and other methods to facilitate access and availability of non-bank financial services and raise financial inclusion levels.

What is  meant by Robo-Advisor for Investment?

Robo-advisor is a digital platform that uses artificial intelligence (AI) to provide automated investment advice. It helps clients build, manage, and adjust their investment portfolios based on their financial goals and risk tolerance.

How to provide automated financial advisory services?

Companies provide automated financial advisory services, through two business models:

Model 1: Robo-advisor builds and manages the portfolio.

Robo-advisor uses algorithms to create and manage investment portfolios based on automated financial advice. However, a human portfolio manager still reviews the Robo-advisor’s recommendations before they’re implemented. Finally, the actual buying and selling of securities is also automated through a brokerage firm

Model 2: Robo-advisor Rebalances the Portfolio

Portfolio Manager analyzes the Robo-advisor’s suggestions (generated by the program) and uses them to make decisions about rebalancing the client’s investments.

What are the entities allowed to use Robo-Advisor ?

The decision allowed portfolio Management Companies to provide automated financial advisory services through Robo-advisor.

What are the requirements set for companies wishing to use the Automated Financial Advisor Investment Program?

Companies must have a minimum capital of 15 million EGP to use Robo-advisor. This capital needs to be fully paid-in upon submitting the application form to the Authority.

The company’s board of directors needs to approve a document outlining the program’s management structure. This document, supported by evidence, should demonstrate the adequacy of the procedures, human resources responsible for designing, implementation, testing, operating and monitoring the program- whether it was provided by the company itself or through specialized entities.

The decision required AI technology to be transparent, disclosed and documented, data management, conformity assessment, fit for purpose, trackable.  There should be a mechanism for human intervention, especially when critical decisions are involved.

Robo-advisor companies need to have a clear policy for managing their algorithms. This policy should cover the entire lifecycle of the algorithms, including: design , selection, operation and development.

In addition to document retention controls for software design that clearly define the purpose, scope, and design of algorithms, as well as cybersecurity arrangements.

There must be clear procedures for handling situations where algorithm outputs are challenged, overruled, or service delivery is paused temporarily. In such cases, the company is obligated to inform the Authority beforehand. This notification must explain the company’s reasoning for taking such an action.

The decision mandates regular reviews and updates to algorithms whenever factors like new regulations from the Authority might impact their effectiveness. Additionally, the company must proactively notify the Authority before making any changes that alter the underlying methods or strategies used by the algorithms. These notifications should clearly explain the reasons behind the proposed changes.

The software automatically shall check – annually – client data for any modifications or updates compared to the information previously provided.

Is it possible to utilize external expertise for creating the program?

Portfolio management companies can leverage the expertise of external specialists for program creation, design, or development.

The decision stipulates that the company would be accountable for verifying that program requirements were fulfilled, even if delivered by one of these entities.

The company  shall  supervise the conduct of necessary tests to obtain results that comply with the Authority’s controls. The company retains full responsibility for any operational risks associated with the program. If relying on other service providers, the company needs a comprehensive plan for program supply and operation.

How the program might determine customer’s risk level and investment objectives?

Before offering automated investment advice for listed securities, the program asks customers a series of questions. These questions help the company update its risk assessment model and determine the specific risks each customer is comfortable with for this type of investment.

The program’s questions needs to gather data that allows its algorithms personalizing investment advice. This data should include, at least, customer’s investment goals and investment timeline.

As well as the amount customer wish to invest, the degree of risk he accepts and bears, his financial position, including regular income, assets, expected liquidity and any other financial liabilities.

In addition, the regulator requires the company to get an explicit consent from the customer before taking any automated actions.

The company is required to have cybersecurity insurance from an authorized insurer to protect against cyberattacks and data breaches. Also, the company can choose to obtain additional insurance to cover other operational risks associated with the program. The program’s algorithms must be designed with safeguards and procedures to identify and address any potential errors, biases, or unfair outcomes that might influence their investment recommendations.

The program generates a report that analyze the entire investment portfolio, including individual securities and financial instruments. It assesses risk level of each investment within the context of the portfolio as a whole.

Moreover, the program generates portfolio strategy report. This report evaluates the overall suitability of investment portfolio strategy. This likely considers risk tolerance and investment goals.

After analyzing customer’s information, the program may recommend that investing in securities and financial instruments through robo-advisor is not suitable and does not match customer’s goals.

The company must adhere to Tech Infrastructure & Security requirements determined by the Authority. The company shall assign a dedicated manager licensed by the Authority to ensure they meet the defined requirements. In addition, a team with the expertise and efficiency to handle both algorithmic methodology and technological aspects must support the program.

What are algorithms?

They are automated sets of instructions that can be used to solve problems or complete tasks, sometimes with the help of AI techniques, including machine learning, logic & knowledge-based approach, or statistical application.

What are the most important terms likely included in the client’s contract with the company for automated investment consultation?

The contract clarifies the scope of automated advice, investment goals and controls in addition to the portion of risk customers accept when investing through the program.

It clearly outlines all fees, commissions, and other expenses associated with the service. The company is obligated to act in customers’ best interest (utmost care) when pursuing investment objectives. All transactions will initially occur in a virtual account (simulation account) for at least one month. This allows testing the program and its recommendations before potentially using real money. The contract will specify any costs or commissions associated with these simulated trades.

Moreover, the contract shall include an explanation of the mechanism for notifying the customer of trading orders status, the actual verified performance reports and the expected future performance, in an updated and periodic manner. That is besides keeping a record of all past and current transactions that have been carried out through the program.

The contract must also provide customer’s right to -temporarily- suspend automated transactions through the program. On the other hand, if a disagreement arises between customer and the company regarding the performance of the contract, the default method for resolving it will be through the Egyptian Centre for Optional Arbitration and Settlement of Non-Bank Financial Disputes. However, the contract may allow for an alternative dispute resolution method if both parties agree.

The contract, and any other disclosures, statements, or reports must be provided in Arabic. If these documents are offered in multiple languages, Arabic must be one of them.

These regulations stem from Law No. 5 of 2022. This law governs the use of financial technology (FinTech) in non-bank financial activities in Egypt. Specifically, Article VIII of this law allows companies to offer automated financial advisor programs through electronic applications, but only with  the Authority’s  approval.

FRA is making significant progress in digitizing non-bank financial activities, empowered by Law No. 5 of 2022 with the aim of digitizing non-banking financial transactions. In this respect, FRA has issued decision no.239 of 2023 regarding equipment and technological environment and decision no.140 of 2023 on digital identity, digital contracts and records and finally decision no. 141 of 2023 on outsourcing service provider register.

Dr. Mohammed Farid, FRA’s Chairman, announced that these new regulations mark the first time Egypt will allow companies to offer automated financial advisor programs. Companies interested in providing this service can now seek approval from the Authority, provided they meet the established requirements.

FRA’s Chairman believes automated financial advisors will make Egypt’s capital market more competitive.  He emphasizes that Egyptian Capital Market offers a wider range of investment options, catering to the diverse needs of various investor groups. This aligns with  FRA’s vision of promoting digital transformation for financial inclusion and expanding the base of people who benefit from non-bank financial services, specifically participation in the stock market