Dr Tim May, the chief executive of the UK's Wealth Management Association, delivers a Yuletide message to the wealth management community.

Dr Tim May, the chief executive of the UK's Wealth Management Association, delivers a Yuletide message to the wealth management community. Regulation, it is well-known, now looms as large in the minds and mailbags of CEOs in the business as any other consideration and his review of the issues we all face is testament to that fact.

The year 2013 is nearly over, so we can with some confidence offer you statistics about the amount of regulation the Wealth Management Association has had to process this year.

We calculate that we have sent 20 responses to the Financial Conduct Authority (or the Financial Services Authority) alone this year. Our collective eyeballs have scanned more than 2,000 pages of detailed regulatory drafting (again, this is just regarding the FCA), not to mention the many speeches, articles and commentaries by policy-makers that accompany each tranche of regulatory reform from the UK, Brussels and beyond. And yes, we follow all those policy-makers on Twitter too.

But of course these numbers suggest only the quantity, and not the quality, of the output from our regulators this year. The quantity is insupportable; but the quality in some key areas is improving considerably.

A growing burden

Despite the need for businesses to develop, regulatory reform in the wealth management sector is producing ever-larger mountains of paper. No doubt you already know this, and you feel as we do that the growth is accelerating at a worrying pace, with few signs that it will ever slow down again.

We have noted with some envy, then, the achievements of business minister Michael Fallon in simplifying the regulatory environment for UK companies in other sectors, championing the “one-in, two-out” principle of regulatory reform and the “red-tape freeze” that exempts the smallest businesses (i.e. the ones with ten employees or fewer) from burdensome new regulations. Unfortunately, both of these initiatives have bypassed financial services as a result of the recent banking scandals and the global financial crisis.

This is a trifle unfair. The wealth management industry was not an agent in the banking scandals and its clients were victims rather than participants in the global financial crisis. We are therefore calling on the Better Regulation Executive to review the regulatory regime that governs the wealth management sector with a view to ensuring that every new regulation imposed on the industry is counterbalanced by the removal of two others.

Regulation is now 10-20% of turnover!

There is an irrefutable economic case to be made for this. KPMG, the accountancy firm, reported earlier this year that chief executives at wealth management firms estimate that regulation consumes 10 to 20 per cent of turnover, which could equate to up to 50 per cent of profits. [Editor's note – ten years ago, an industry survey concluded that it accounted for 1.6% of the City's turnover. Even then, some commentators were saying “is that all?”] It is difficult to envisage the Government allowing such a state of affairs to persist in any other industry, where simply complying with the rules for doing business halves the industry’s profitability.

And there is a greater economic risk as well, as the savings gap widens. The recent ComPeer/E&Y survey of wealth management clients showed that two-thirds of those questioned (66 per cent) believe the additional cost of regulation will be passed on to them. Our industry therefore is becoming more costly to its core clients at exactly the point when we should be trying to assist those families stuck in the advice gap created by last year’s Retail Distribution Review.

A better relationship at home

The quality of regulation is directly proportional to the degree to which the regulator understands the customer. This may sound trite, but it is clear to us as a representative body that our responsibility is to work with policy-makers – be they in Canary Wharf, Westminster, Brussels or beyond – to ensure that the needs of wealth management clients are understood. And we have good news to report this year.

For too long our regulators have failed to understand our industry, or more accurately failed to find a place to categorise it among the regulatory silos of wholesale and retail; our members, of course, require access to the global financial markets (wholesale) in order to serve the needs of their all-too-human clients (retail). Many of our activities would be considered wholesale,our customers retail.

We were therefore delighted that this year the new regulator – the Financial Conduct Authority – liberated us from the “too difficult” box and set up a Wealth Management and Private Banking Unit to address these issues and to understand the community better. Initial indications are that the new regulator’s change of approach is resulting in genuine consultation with our industry, and due consideration of the effect of regulatory change on our clients. After all, our sector manages some £600 billion of wealth for more than four million people. The FCA appears more ready to accommodate our sector and we welcome this.

The scourge of 'bank-think'

Although we might be coming to a better understanding with the people at Canary Wharf, however, our clients still run the risk of becoming victims of collateral damage from political imperatives in Westminster and Brussels that stem from the banking crisis. We remain concerned about the overwhelming predominance of 'bank-think,'which infuses legislation and regulatory strategy and militates towards a potentially damaging one-size-fits-all result that targets all firms as if they were banks – and often large, systemically vital banks at that.

Amid the big questions about the future shape of the financial system, nobody seems to care much whether a private banking client can sit within the retail part of the ring-fence yet buy a derivative traded by the wholesale part, for instance. Under the coming Banking Reform Act, high-net-worth investors will be able to apply for a certificate which will afford them access to things outside the fence. The mechanism by which this happens must be made to work effectively or business will suffer. Then there is the question of client money: on which side of the fence should this be stored?

The blizzard of directives

Cross the channel to the continent and people's understanding of our clients’ needs is diluted still further. You may already know about the proposals before the European Parliament to improve transparency for Packaged Retail Investment Products (PRIPs) by requiring each purchase carried out on behalf of a high-net-worth investor to be accompanied by a Key Information Document (KID). The KID is designed to contain a description “in plain language” of the retail financial product (written by the company which created the product) and then an annex (which sets out the costs) written by the wealth manager in which he/it advises the investor. The most controversial aspect so far has been the scope of the proposal, because the European Parliament initially wanted the KID to apply not only to packaged products but unpackaged products too, including equities and corporate bonds. This would effectively have put an end to share trading as we knew it, but a campaign by the WMA and others has succeeded in getting this requirement, at least for equities, removed from the Parliament’s text. We are still fighting to remove tradeable bonds.

Championing clients’ rights

The prevailing direction of regulatory reform, then, too often serves to curtail investors’ access to financial products which are considered too complicated or risky for them. This well-intentioned view may well be valid in some EU member states which have an investment culture that differs from ours, and probably protects the regulators from problems popping up “on their watch”. But given the different investing cultures across the EU, directives rather than regulations would be a smarter way of standardising the investing cultures of 28 different countries!

With all our members labouring under EU regulation, we do a great deal of work in Brussels. For the most part we spend our time educating policy-makers rather than lobbying them. Whenever an initiative aimed at protecting investors from sharp practice looks as though it might end up curtailing their freedom to prepare for their financial futures instead, we are always on hand to demonstrate the truth to them in the least ambiguous way possible.

Ultimately, then, we try to encourage the EU to weigh the rights of the investor against the appropriate degree of protection. And perhaps the UK can point the way here. The answer is surely to empower the investor – to enable the investor to choose for himself the degree of protection he needs, and to give him the commensurate degree of freedom to invest as he chooses.

By way of example, consider the proposed requirement to send unit-holder statements twice per annum. There is no reason why clients should not be able to opt out of this, perhaps through a signed note (contract) kept on file.

The current regulatory agenda

As we approach the welcome end-of-year break, the one time of year when the pace of the financial world slows down, it is evident that the number of regulatory consultations due is significantly lower than last year, when it seemed as though everything had a deadline in December. But there are some major policy issues still on our desks that may well set the agenda for the early part of next year.

The fourth Capital Requirements Directive (CRD IV) comes into force on New Year’s Day, after which firms ought to be able to follow the 'common reporting mechanism' for financial data. The European Banking Authority has provided supporting templates, but has often obliged firms to go to the additional expense of installing the right XBRL reporting software so that they can run the necessary analyses. Another operational challenge for the New Year.

The US Foreign Account Tax Compliance Act (FATCA) lands next year, requiring all financial institutions to establish the tax residency of all of their account holders (not just US taxpayers). The UK guidance notes prepared by HM Revenue & Customs (and the questions and answers we prepared for our members) will help firms comply with the new rules, but to simplify the process the WMA is preparing a compliant self-certification form for clients. FATCA is the precursor to similar initiatives by other tax jurisdictions, much of it emanating from the work of the G20 group of nations to tackle cross-border tax-evasion. We hope the work being undertaken now will not have to be duplicated as other jurisdictions impose similar rules in the future.

Another pressing priority has arisen in the past few weeks as the Catalyst affair has once again exposed a fundamental weakness in the way the Financial Services Compensation Scheme operates. Again, we have seen wealth management firms picking up the tab for a faulty financial product – in this case a product which originated in Luxembourg. As we have seen before, the designer of the faulty product need pay nothing into the FSCS – it is left to the investment intermediaries to pick up the pieces when it fails. It is important that clients are reimbursed swiftly when an investment product fails, but it is clearly very wrong for intermediaries to bear the burden.

We are, however, able to report one considerable success for our community. This month the EU institutions have been finishing off their 'trialogue' discussions on the second Markets in Financial Instruments Directive and Regulation (MiFID/MiFIR). A principal concern for us with MiFIR had been a clause to the effect that all equity trades should go through clearing houses – something completely incompatible with our UK system of retail service-providers (RSPs). If this clause had been passed, the result would have been the end of the RSPs which facilitate cost-effective and safe share-trading for around 20 million transactions a year for private clients, trusts and charities. In short, it would have been the end of retail share-trading as we know it.

We worked long and hard to inform the EU's policy-makers about the problems that would arise from this clause and the effects it might have on individual investors and on the listed companies themselves. We were therefore very pleased to have received confirmation in the last few days that this clause has been deleted. We believe that common sense has prevailed on this, but oh so much time has been spent on it.

Europe, Europe, Europe

Even with the European Parliament breaking up in the New Year for the May elections, the pace of regulation is unlikely to slow down. The new MEPs are likely to continue to press on with reforms, with plenty of sound-bites to impress voters. Indeed, they will probably have a renewed mandate for doing so, as anti-finance rhetoric invariably tends to ramp up during election campaigns.

Many also believe that the May elections will see the UK Independence Party make gains beyond its current nine seats. If so, we shall face a new challenge in our fight to ensure that our voices are heard in Brussels. The UK has to continue to collaborate with EU policy-makers. Only then can it make a strong case that our financial services sector is not only good for the UK but also for Europe.

And with that in mind we should remember that the European Commission rises next year as well. The heads of the EU’s civil service will resign and be replaced with a fresh set of commissioners.

And finally – the good news

We can end the year on a high note, however. Funds under management in our sector topped £600 billion for the first time. There are a number of factors at play here of course. Stock markets have been rising all over the world, which has helped increase the value of clients’ portfolios. But there is also the fact that savers are increasingly turning to wealth management firms as the best answer to their frustration at the negligible returns from savings and pension provisions.

Long may that continue, and I end by wishing you the compliments of the season and a very happy and prosperous New Year.