Generative AI chatbots may be breaching financial adviser licensing and regulatory requirements of the Financial Markets Conduct Act (FMCA), according to Chapman Tripp partner Tim Williams.
Williams raised the concern in the recent update on insurance industry legislation to more than 450 members of the Insurance Brokers Association of New Zealand (IBANZ) saying it’s fine, from a licensing perspective, for AI tools to offer factual information about financial products, but straying into the territory of offering an opinion on specific insurance policies or investments is likely to be a breach of the FMCA if the AI tool is not licensed.
“When an AI tool strays into the territory of recommending a specific product, designing an investment plan or providing specific types of financial planning, then it is clearly giving investment advice, and that is in breach of New Zealand law as it is currently written. We all understand that offering financial advice is a regulated activity in New Zealand, and to my knowledge, no AI chatbot is licensed as a Financial Advice Provider.”
Williams used examples from a popular AI tool to demonstrate how readily it crossed the line from giving purely factual information about financial products to recommending a specific life insurance policy and naming a specific exchange-traded fund as the best option for passive investment in the US stock market. Similar concerns have been raised in Australia about the suitability of AI chatbots giving share trading recommendations.
“The Financial Markets Authority (FMA) should investigate whether the current legislation is responding appropriately to the rapid development of AI capabilities. If not, a decision is needed on how retail clients’ interests in accessing useful financial information can be balanced against the risks of receiving potentially unsuitable advice without the full protections of the FMCA”, Tim Williams said.
IBANZ CEO Katherine Wilson supports Williams’ concerns and has raised the issue with the FMA, which currently has a workstream focused on ensuring New Zealanders have access to financial advice.
“IBANZ members employ several thousand qualified financial advisers. We operate a comprehensive professional development programme which helps ensure our members are well equipped to provide high-quality financial advice. We're aware that the advice available via AI tools can be of questionable quality and continue to be concerned about the potential harm inaccurate or misleading advice could cause. IBANZ has raised this issue with the FMA because we believe it’s an important matter for the regulator to consider.”
Williams also advised IBANZ members that if they are using AI tools in their practice, they need to be aware of the potential for their own breaches of the Code of Professional Conduct.
“If they are relying on generative AI advice in formulating a recommendation for clients, then they need to be able to demonstrate that use is reasonable under the circumstances.”
He also stressed the need to maintain client confidentiality. “Members should ensure their prompts used for AI tools are depersonalised so that client information is available only to authorised personnel of a financial advice provider, as required by the code standards.”
