A firm that guides wealth managers through the complex web of financial regulation recently explained why the challenges are not always as frightening as they appear.

One of the side effects of the current regulatory upsurge in financial services is that companies specialising in guiding wealth managers in the legal maze have found a lucrative business niche. Case in point: IMS Group, a UK business.

The firm, which employs more than 60 professionals with 600 investment firms as clients, has been advising businesses on subjects ranging from the UK Retail Distribution Review programme to shake up the financial advisory industry through to the registration requirements of the US Securities and Exchange Commission.

The recent £494,000 (around $766,0000) fine on the UK wealth advisory business, Towry, for example, is a reminder of how the UK watchdog – currently being stripped of some of its powers – is determined to show it still has teeth. As governments crack down on alleged offshore tax evaders, or seek to control how firms sell financial products, the regulatory burden is intensifying. According to Scorpio, the consultants, the average cost/income ratio for wealth managers worldwide has hit a record of near 80 per cent, with regulation partly to blame New US tax compliance rules known as FATCA have added to the pain.

But are the issues overblown? Are not some of the changes being introduced simply a case of best practice anyway and should be welcomed? To get some sense of whether these questions are justified or not, this publication recently spoke to Peter Moore, head of regulation and compliance at IMS Group.

What are the main regulatory challenges for wealth managers and other financial (services) businesses at the present time?

“The main regulatory challenge of the moment is the sheer volume of regulatory change, both national and international.  Add to that, the FSA spurred into action by past (and to its credit acknowledged) failings and now following much more proactive agendas of “credible deterrence”, “intensive supervision”, making judgements on firms’ judgements and promising more early intervention in relation to products.”

Such themes include the issue of suitability. “The FSA’s recent themed review has put firms on notice that the FSA is unhappy with the level and quality of much of the 'Know Your Client' information obtained from retail clients and then put into action in investment recommendations.”

Another theme is the FSA’s client money and assets rules, he said. “Many firms find the client money and assets rules (the FSA’s 'CASS' rulebook) extremely troublesome. The FSA appears to have drafted these requirements from the contemplation of large organisations with the result that smaller firms misunderstand and under achieve against very basic requirements of segregation, record maintenance and periodic reconciliations.” 

“The RDR is the UK regulator’s latest attempt to address problems which have arisen from the distribution of retail products. RDR will impact some wealth managers by its new advisor competency requirements and could alter firms’ remuneration models by banning trail commission.”

What sort of mistakes do you see firms making about regulations?

“As the FSA has found in its thematic work, many firms have fallen short of fundamental and longstanding regulatory obligations such as those relating to client money/assets records and suitability. 

Client assets/money is a good example of where regulatory delinquency has been contributed to, certainly not by a desire to fail to comply, but from a perception that the rules are more complex than they actually are.”

“Also we do not believe that all wealth managers are currently fully considering all of the impacts of RDR, perhaps because they have missed the consequence of it affecting the wealth manager one step in the chain up from the product provider.”

“A major failing on the part of many regulated firms is viewing compliance as something imposed on them (by a regulator in an ivory tower) while failing to recognise the value to the client servicing arm of the business of, for example, obtaining relevant personal and financial information on a new client or ascertaining that the funds to be managed are not the proceeds of crime. A consequence of this attitude is that all compliance related matters are tasked exclusively to the compliance department (which can then attract the unfair title of business prevention unit amongst the unenlightened) whereas a more optimal approach is for the business to attend to many of these matters under the direction of compliance.”

Do you think the costs of regulation can be over-blown? How should firms approach the cost of compliance?

“The mantra that compliance is a cost of doing business is a reasonable and acceptable one up to a point.  An unregulated environment is not an option in relation to people’s savings. However, let’s not let politicians and regulators off the hook completely and hold them to their side of the bargain of only introducing new rules where the value of the benefit exceeds the costs of implementation. FSA chairman Lord Adair Turner has admitted that it remains unclear whether regulation is restraining or stimulating the economy in a speech at the European conference on banking and the economy at Southampton University this month.” 

“On the other hand, many firms do overblow the costs of regulation.  They may perceive its cost to be much higher than it actually is and/or fail to recognise the benefits that it can bring. A number of firms under-invest in compliance, falling victim to false economies and then paying for this inefficiency at a later stage when they eventually realise that the costs of urgent cure are much higher than the routine costs of prevention.”

“Another trend is the level of regulatory action.  The regulation/deregulation ‘swingometer’ is of course correlated with the health of the capital markets. Although close to its final 12 months, the FSA has (as noted above) been spurred into action by past failings and is now following much more proactive agendas of 'credible deterrence', 'intensive supervision', making judgements on firm’s judgements and promising more early intervention.”

“Looking internationally and at the bigger picture, a growing theme has been the 'politicisation' of regulation which often manifests as uninformed knee-jerk reactions to economic events. Short-selling bans are the best examples of poor regulatory responses. The EU’s AIFMD and to an extent the US’ Dodd-Frank legislation are examples of when the regulatory agenda is set and driven by politicians.  Westminster, EU and US politicians inevitably have a different outlook, motives and agenda – not just to each other but also to financial services firms or even the regulators of financial services firms.”

Can firms turn regulation to their advantage, and if so, how?

“Robust and fit for purpose compliance procedures and controls can efficiently meet regulatory requirements while also adding value to the client servicing side of the business.  Compliance can and should be embedded within an organisation rather than be a clumsy, uncomfortable and occasionally under-resourced and unsupported bolt-on.”

“Firms can also use the quality of the compliance and control arrangements as a selling point, a point of difference and commercial advantage in securing new business and retaining existing business.  Being an FSA regulated firm should carry a number of benefits and sources of comfort to clients and potential clients. As can the use of third party assurance.”

What sort of demand are you getting for your services?

“We continue to see a high demand for our services.  Start-ups (we assist new firms to obtain FSA authorisation) thrive in upward markets.  The downsizing of larger investment organisations during tougher economic times also leads to an increase in start-ups. As well as assisting start-ups, we work with several hundred regulated investments firms on an ongoing basis by helping them to understand and thus meet their regulatory obligations. We provide tools and coaching on regulatory obligations and then also assess the effectiveness of their compliance processes.”