In the first part of our blog series “Artificial Intelligence in the Financial Industry”, we discussed the topic of artificial intelligence (AI) or machine learning (ML) in securities trading. However, artificial intelligence is also used in asset management to varying degrees. Automated asset management is regularly referred to as robo advice. This is characterized by the fact that the investor makes his investment decision completely or predominantly based on an automatically generated suggestion, for example via a website or app. The solution proposed to the customer is based on an algorithmic analysis of the investor’s data, such as his investment goals, financial situation or financial knowledge. Unlike automated securities trading, there are no special legal regulations tailored to automated asset management. BaFin therefore examines on a case-by-case basis whether the robo advice provider provides regulated financial or securities services that are subject to a licensing requirement under the German Banking Act (KWG) or the German Investment Firms Act (WpIG) and thus require the prior obtaining of a BaFin license.

No Universally Valid Qualification of Robo Advice Possible

Should artificial intelligence be used in the context of asset management, it must be examined on a case-by-case basis whether an element of authorization under the KWG or the WpIG is fulfilled. The robo advice provider may, for example, provide investment advice or conduct financial portfolio management, depending on the specific nature of the design of its service. If the AI is used to make personal recommendations taking into account the investor’s personal circumstances, this may constitute investment advice requiring a BaFin license. This may be the case, for example, if the provider obtains information from the investor on his risk profile and financial background in order to recommend a specific investment in a financial instrument on this information basis via its algorithm. In contrast, a provider engages in financial portfolio management if he invests the investor’s assets in financial instruments and has his own scope for decision-making. This can also be automated if, for example, an algorithm designs an investment strategy or a model portfolio on the basis of a catalog of questions and then either an asset manager implements it or the trades are also automatically executed by algorithm. However, investment advice and financial portfolio management should only be mentioned here as examples. Depending on the specific use of the AI, other financial or securities services may be relevant in individual cases.

BaFin License and Compliance with General and Specific Rules of Conduct Required

Anyone who uses artificial intelligence as a service provider and thereby provides financial or securities services requires a BaFin license for these activities. In addition, the provider of the corresponding services must observe the general rules of conduct under the German Securities Trading Act. In the case of robo advice in the form of investment advice or financial portfolio management, BaFin has again defined specific rules of conduct. These include explaining to the customer to what extent persons are involved and whether and how contact can be established with an employee. It must be made clear to the investor that the information he provides has a direct impact on the suitability of the investment decisions. Furthermore, he must be informed in a comprehensible form on which sources of information the investment decisions proposed by the robo advisor are based. It must also be explained to the customer how and when the information provided by him must be updated.

Attorney Dr. Konrad Uhink