Editor’s note: This article is by Chris Kaye, chief executive of co-comply, a software product in the asset management market that aims to give a single view of a firm's compliance framework. He looks at the relentless wave of regulatory developments, such as the UK’s Retail Distribution Review and the US Foreign Account Tax Compliance Act, examining the approach that firms should, in his view, take towards compliance. The views expressed here are not necessarily endorsed by this publication but it is grateful for this contribution to the debate. As ever, WealthBriefing welcomes any responses.

Today’s regulatory change is tomorrow’s “business as usual” for the wealth management industry. When the dust has settled on RDR-led restructuring, FATCA and client suitability - and as the markets continue to underperform - wealth managers will have to adapt their business model to account for the increased role of compliance within the firm.

Wealth managers have historically underinvested in technology to support the compliance department. Many business owners view compliance as a “back-room” service, but this perception can no longer be justified. An effective compliance framework is not just a regulatory necessity; it can also add value to the firm by protecting the brand from regulatory fines and the ensuing reputational damage. The recent example of Coutts (see here) and its failings over anti-money laundering processes aptly illustrates the dangers that lurk for wealth managers and private banks.

The cost of adapting to new regulation is not just a one-off capital expenditure - it will affect the bottom line for wealth managers for the foreseeable future. Wealth management firms have traditionally found budget for implementing regulatory change, but when it comes to sustaining the requisite elevated compliance framework and culture, will they then be able to find the resources?

All too often the impetus gained during the change programme is lost as soon as the transition to business-as-usual occurs and available resources are redirected to the next challenge coming through.  The current drive by global regulators can no longer allow this situation to continue within wealth management firms.  These regulations are not just one-off changes but form part of a drive to increase consumer protection and to make firms more accountable – and the compliance department is at the heart of this. 

The “Dear CEO” letter from the UK’s Financial Services Authority concerning client suitability had major ramifications for the compliance department and the firm as a whole.  The resultant rush to improve client relationship management systems and client on-boarding checklists will help but how will compliance continue to ensure that the employees involved in the process - and senior management - are continually apprised of the suitability requirements and that a real culture of “putting the client first” is created?

The “Dear CEO” letter also had implications beyond client on-boarding: it required firms to increase the checking undertaken by compliance to ensure that all of the firm’s financial promotions are suitable for the target audience.  The compliance team also had to increase the frequency and effectiveness of its monitoring and testing programmes to provide the independent suitability check that regulators require.

Furthermore, the team must ensure that any issues identified are fed back through the continuing compliance guidance and communication provided to the on-boarding and client relationship teams.  All of these activities are not being managed by a suitably resourced change project, but as part of the day-to-day conduct of a compliance department.

Surging costs

Suitability is just one example, but as each regulatory change is implemented, the cost of compliance can escalate exponentially.  How many additional filing and reporting obligations does the firm now have to manage as a result of RDR and FATCA compliance?  The impact of this is felt by compliance but also other areas of the firm such as finance and tax that have experienced increased workloads in preparing the source data to be filed.

Wealth management firms will need to examine these processes to see how they can be improved and what tools can be provided to ensure that the compliance team maintains the necessary oversight and governance required.

The approach to implementing regulatory change or supporting the firm as it pursues new business opportunities requires a coordinated and integrated approach to implementing the firm’s compliance framework. The impact of any change is broad and therefore an effective compliance framework has to support the end-to-end activities that compliance must undertake, from effective employee communication, training and advice to independent monitoring and thematic reviews.

Firms that invest in their compliance framework will ensure they are in a stronger position to meet the regulatory challenges and can benefit by pursuing new business opportunities at home and abroad without destabilising the firm’s control framework.  Wealth management chief financial officers should also remember that the cost of non-conformance is often significantly higher than the investment required to build out an integrated compliance framework. 

The FSA’s use of section 166 notices is on the rise. These notices require a firm to use an external party or specialised person to ensure any shortcomings identified by the FSA are resolved.  The cost of engaging an external party and the implementation of their independent findings can far exceed the initial investment to construct a robust and integrated compliance framework.