Client Affairs

The Lockdown: How Wealth Managers Are Coping

Jackie Bennion Deputy Editor 2 April 2020

The Lockdown: How Wealth Managers Are Coping

For a sense of the immediate impact of the health crisis on wealth managers as they meet client and reporting obligations, we spoke to the head of regulation at PIMFA and other groups supporting the sector, and report on fresh guidance from the FCA.

No matter what sector you are in, the coronavirus has crudely divided along essential and non-essential services as banks and the government mobilise a national response. The first bottleneck has been waiting for guidance from the Financial Conduct Authority, as it manages queries from across the regulatory landscape. Wealth managers' concerns may not be top of its priority list.

“What we are telling members is that you are basically going to have to adopt some judgments in reconciling your obligations with the duty of care you owe to your employees and essential workers travelling into firms,” said director of regulation at PIMFA Ian Cornwall in a call this week.

His role at the trade group is primarily engaging with firms, picking up their queries and being “fairly frank” with the regulator. “I have those conversations that the firms would like to have but can’t, and doing it in a sensible way.”

On Wednesday, the FCA delivered some of that much needed clarity to wealth management and financial advice firms.

In a "Dear CEO" letter written to all firms, the watchdog outlined temporary measures that included more flexibility over client identification verification in regard to KYC and AML checks; and more flexibility over “best execution” practices until the end of June. The FCA said it has worked with the European Securities and Markets Authority (ESMA) on clarifying reporting and where leniency will apply. ESMA too updated its guidance late on Tuesday night. As of Wednesday, the FCA also issued flexibility for portfolio managers on sending client depreciation notifications when investments drop by 10 per cent or more, at least until the end of September. (For a separate commentary about this 10 per cent rule, which comes from the MiFID II directive of 2018, see here.)

Other investment initiatives in the works have been paused indefinitely. The full guidance is published here.

PIMFA chief executive Liz Field said that she was “greatly encouraged” by the FCA’s response. “It shows the constructive work that has been carried out by PIMFA on behalf of our members. It also shows the FCA has not only been in ‘listening mode’ but has taken the concerns of our members seriously and has been willing to act and show the regulatory forbearance I have said our members need to continue to serve their customers in these extraordinary times.”

In a crisis environment, legal certainty is a huge issue as governments and regulators grapple with how to act without being in breach of the law; their own and international treaties. Businesses want forbearance that allows them to uphold the rules but still have room to cushion the impact of COVID-19. It is this channel of communication that PIMFA and other organisations have been trying to bridge between regulators and businesses, when all are overstretched.

“What we have told firms is document the judgments you are making and explain why you are doing it, and make sure you have a game plan in place to monitor those judgments, so that as and when more staff become available, you have a process in place to recover that position,” Cornwall said.

Like the virus itself, firms are being hit differently at different times, and in different ways, even in the same city, PIMFA noted. A firm with an administration centre in London is initially being more affected than a firm with one based in Glasgow, for example.

Getting through the work
Many queries have been about day-to-day processing mostly involving shifting paper. Although rare now, there are issues on how to produce manual checks and transfer stock and share certificates between parties, where physical reconciliation requires people being in the office. Also how to keep new client activity moving when some are now reluctant to put important documents in the post.

Banking ISA checks after 5 April is a mundane query, but there are problems with the post and firms are asking what the view is from HMRC. “A lot of the queries we are getting are very much, 'In these circumstances, what do you think we should do? Also, what are other firms doing?'” Cornwall said.

Firms are also nervous about the potential impact on the Financial Services Compensation Scheme (FSCS) if many don’t have the resources during this period to stay afloat.

While the FSCS is robust, with industry backing, including from all the major banks, it could “get painful” where weaker firms, despite meeting their suitability obligations, are taken over once the dust settles. "If you have a viable business and firms have been looking to merge or sell, this is historically what happens in a difficult market,” Cornwall said.

The shutdown is also raising concerns about where training and competency programmes, cancelled mid-stream, leave practitioners who may not be able to renew their statement of professional standing (SPS), for example, to continue advising. The association wants guidance on what to tell firms and training groups.

One of the biggest compliance concerns has been filing CASS audits. There to protect client assets, CASS rules basically require firms to keep client money separate from the businesses in segregated client accounts and ensure that they register custody assets appropriately -- effectively ring-fencing clients in the event of insolvency.

“The problem with CASS is there is no materiality threshold, so any rule breach has to be reported in the audit report and it is also very expensive as a piece of work,” Cornwall said.

“What we would like the FCA to outline during the coronavirus period, for however long it lasts, is some kind of materiality threshold, rather than get every rule breach reported on for a period when firms did not have the resources to deal with them.”

It is a similar case reconciling annual accounts. Some of these are due soon, leaving some firms scrambling with accountants and auditors to figure out how these can be done entirely remotely and on time.

The pandemic has crystallized the scale of auditing and compliance burdens facing firms, some a legacy from the last global crisis, only this time the financial sector is not to blame.

If it is any comfort, Cornwall said, “I can’t believe there is a firm out there at the moment, as a result of the coronavirus, that can turn around in three months’ time and say we totally adhered to our regulations during the last three-month period.”

Technology is making it fairly easy for businesses to switch over to remote working, with a few home broadband hitches, but those firms reliant on third-party providers for regular technical and administrative support are especially vulnerable. PIMFA said some are already experiencing issues with suppliers of IT equipment and courier services. That said, the  association has not seen any rise in security breaches.

“We have a very good cybersecurity working group and mentioned this as being an area of concern but we are not picking up anything at the moment as being a problem."

Cornwall suggested that the strongest security control for the sector is not so much in all the cybersecurity housekeeping but the fact that wealth managers generally have a very good knowledge of their clients. “They quite often know when something is odd and they can pick up the phone.” Problems will arise if a wealth manager falls ill and someone else has to manage the situation. “I am not going to pretend it is not a worry because it is,” he said.

Also, while firms are moving most of their correspondence online, issuing e-documents doesn’t always have client consent, and some firms may have to forego getting consent if offices are closed with no means of issuing a paper document.

Firms are having to think on their feet.“The vast majority are using their scarce resources precisely towards clients," Cornwall said. PIMFA's guidance is to do what is right by the client. "Clients interests come first and for most firms it is absolutely in their DNA,” he said.

FCA relaxes the rules 
The decision by the FCA to suspend the 10 per cent drop letter process (as referred to above) has been welcomed. 

“The news that the FCA is prepared for some flexibility with the 10 per cent drop notification will be welcomed by many. Operationally it is very challenging and at a time when all mixed asset class portfolios are suffering similar falls the notification is not in itself helping to draw attention to exceptional performance of a fund or a fund manager. The broad media coverage of market falls means that the FCA can be confident clients will not be surprised or ill-informed about the likely impact on their investment portfolios," Lawrence Cook, Sanlam head of UK Intermediary Distribution, said.

“This does not change the responsibility we and advisors have to reach out to clients and respond to their concerns. The recent market falls will emphasise the benefits of financial planning not merely investing. When investing has no higher purpose or objective then any fall in value is seen purely in those terms and not in a wider context. In this situation a client with an investment objective of, say, 4 per cent real returns could be forgiven for looking at their 30 per cent fall and believing that their investment manager, or their advisor has failed them," Cook said. 

“Overall, this feels like a sensible step from the regulator and shows some agility in adapting policymaking. I don’t think it sets a precedent other than the FCA being proactive and engaged. If that’s a precedent then it is a good one," he added.

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