Will ASIC use AI for advice compliance monitoring?

The rapid expansion of artificial intelligence (AI) applications in the financial advice industry has led to a prediction that ASIC could soon incorporate AI into its compliance and audit checks of advisers.

Financial technology firm Padua envisions a future where AI could be used to check if advice firms are meeting regulatory requirements and to check for compliance in advice documents and other supporting materials, such as file notes.

Padua co-chief executive Matthew Esler said AI is already being used in advice firms around Australia and each stage of the financial advice process, particularly in data collection, and is likely to be further impacted by emerging AI applications.

"Many advisers are now using natural language AI in their day-to-day operations. Within the advice process, AI can also be used to record minutes of meetings and in the creation of fact find information and file notes," he said.

Esler said that important considerations for advisers include that AI-generated file notes and fact find information comply with Australian regulations and laws.

"There's a real risk for financial advice firms inadvertently providing recommendations in the information gathering stage which would necessitate an advice document with five days," he said.

"We expect ASIC will be monitoring this. Firms too will have to manage their use of AI through a combination of robust technical measures, comprehensive understanding of the regulatory environment and continuous oversight."

Esler added that large language models (LLMs) can handle routine data analytics to validate client datasets, ensuring the 'client story' remains viable and consistent throughout the entire advice process. This capability can save advisers significant time in verifying and correcting client data.

"Within investment management, AI can be used for portfolio optimisation by analysing data and developing portfolios that maximise risk-adjusted returns, as well as to helping to execute trades automatically based on pre-defined strategies or parameters," he said.

"There is some great automation and optimisation technology which will assist financial advisers in matching the best advice strategy recommendations to the client's goals and objectives. Padua Recommend technology is leading the industry on this front but there will no doubt be other competitors coming into the market to develop AI applications for financial advice."

However, careful oversight is crucial. Some licensees have already encountered risks with AI, as it records comments made by advisers, potentially leading to unintentional advice being given during meetings. There's also the concern around 'deep fakes' - impersonating another person using AI, with fraud a major challenge for advisers, and every person online.

Esler said that to address these challenges, advice firms must have a comprehensive plan in place. This includes implementing robust data security and privacy measures, adhering to best practices, and following regulatory guidelines.

"Firms should establish clear AI governance frameworks, ethical principles, and risk management strategies and invest in training and upskilling employees to build AI capabilities or collaborating with experts in the space," he said.