This news service speaks to BNY Mellon Pershing, a business with considerable interplay with compliance and regulatory issues around the world.

This news service looks at the latest rules that have been rolled out for major financial centers, not just to prevent or halt certain activities but also to give permission for new structures and ways of doing business. Compliance, love it or loathe it, is a big part of wealth managers’ lives. How do firms square the circle of keeping compliant without starving business of expansion capital? What training do managers need? Can smart compliance be a differentiator?

In this interview, we talk to BNY Mellon Pershing and three of its senior figures: Linda Gibson, director, head of regulatory change; Mike Rothwell, director, country manager (Channel Islands), BNY Mellon Pershing, and Mike Horan, director, head of trading, BNY Mellon Pershing. 

Not all of the issues here directly apply to the US, but given the global nature of much wealth management, we hope this article is valuable to advisors and other industry figures around the world. 

Would you say that the big increase in regulations from different parts of the world (European Union, such as MiFID II, GDPR and the US – Dodd Frank) are now likely to be followed by a period of adjustment and some stability? 
Gibson, Rothwell: Wealth managers and regulators alike are operating in some of the most challenging conditions to face markets for some time. In the last few years, new regulations have been two a penny. At the beginning of 2022, firms were tasked with implementing three major new regulations in as many months, with the introduction of the UK Prudential Rules, then the EU MiFID Quick Fix Directive, then the UK Operational Resilience requirements. While opportunities exist, these tend to be outweighed by downside risks, and failure to keep pace with constant change.

Any sense of stability brought about by new regulations of late has been swiftly followed by the emergence of unforeseen challenges. This is no real surprise, as any material changes to how firms operate tend to be followed by “fixes” down the line. It’s also not uncommon to see reciprocated regulatory arrangements in international territories after new legislation is introduced in one country (for example FATCA, an attempt by the US to clamp down on tax avoidance globally which spawned intergovernmental agreements around the world). 

The knee-jerk reactions that tend to come as a result of regulatory or legislative change are only adding to firms’ already-burdensome workloads. Complexities abound further when considering the need to ensure regulatory alignment across multiple jurisdictions, as is increasingly the case with EU/UK divergence. Firms and regulators face a shared challenge in resetting the approach to how regulation is made, and how requirements can be met in a way that meets the needs of international stakeholders. A period of significant reflection and adjustment is likely.

Overall, does the firm think that all these regulations have been a net benefit to the ultimate end-clients (which is supposed to be the point of all this) or not? Is the financial system now more stable, or have other issues built up that will need fixing later? 
Rothwell: A massive simplification of the regulatory landscape for end investors is required. The pursuit of transparency and clarity has all-too-often resulted in a weight of information that is unhelpful to end investors. A more principles-based approach, focused on telling investors what they need instead of overloading them with unnecessary information under the guise of transparency, seems a sensible direction. This would also align nicely with recent enhancements to how clients receive their information, with electronic communication increasingly preferred over paper statements.

From the wealth management perspective, what changes in regulations that have taken place have been the most important for the past few years, in your view? 
Horan: The UK Retail Distribution Review was the most impactful to end investors, with a clear focus on enhancing transparency and providing professional advice for this group. While the RDR has been the catalyst for similar reviews of investor outcomes around the world, questions remain as to whether it has truly improved the provision of good advice in the market, and whether increased regulatory costs to providers have led to cost reductions for investors.

From a trading perspective, MIFID II clearly caused a paradigm shift in the way wealth managers chose to execute their business through outsourced trading providers. Four years on, those pressures still remain though we are seeing the emergence of new trends in relation to trading patterns. Firstly, order flow into ETFs has increased significantly.

The rise of passive investing has been well-documented since the onset of the pandemic and the increasingly risky nature of equity markets. With volatility expected to linger in various guises, passive strategies are likely to occupy a greater role in portfolios going forward. Second is the migration toward leading index stocks with lower risk/reward ratios, as investors aim for wealth protection versus wealth generation that they previously sought in the more esoteric sub-index equity names, and other riskier assets. Regulation has had a role in driving this too; easier, more “vanilla” products are a much-desired alternative to expensive, complex trading instruments. CSDR is further increasing this trend driving investors and firms toward more liquid stocks for fear of penalties. 

We can’t forget Brexit. While wealth managers were required to relocate their businesses ahead of the 2020 deadline, pandemic-induced travel restrictions have challenged the practicalities of relocation. We’re some way off being fully “post Brexit.” The watch-and-wait approach to relocation continues. 

Regulation is a cost, but how firms adapt to them can often gives them an edge and formalises best practice. Where you see particular examples of this? 
Gibson: Particularly in the case of the EU MIFID Quick Fix Directive, which mandated the move to electronic reporting, there have been clear positive implications in terms of efficiencies. Most firms seized this opportunity to turbocharge the electronic delivery of investor reporting in the UK and Europe. The rule change should have long-term benefits too, helping to reduce costs and drive the coordination of systems used by firms. 

With the introduction of new regulations, firms are generally required to go through a process of increased data collection, storage and reporting. Savvy firms will ensure that they make good use of this data for their own purposes, for example to enhance risk management and inform business strategies. Careful monitoring of regulatory speeches can also be incorporated into horizon scanning for future changes, helping to create a clearer view of what has to be implemented in the short-term, and what could be introduced down the line.

Handling regulatory change in-house is, without a doubt, a challenge for wealth managers, but something that can have clear benefit in terms of the efficiency of their operations and the service eventually received by clients. If wealth managers cannot use regulatory change positively, it is worth considering how much of these obligations are retained internally, or whether outsourcing to specialist firms will enable them to benefit from the expertise of others. 

Where do you want to see improvement in, say, the kind of structures, laws etc that regulators could roll out that would aid wealth managers in doing their job?
Gibson: Regulation should be easier to navigate, particularly for firms without access to big legal and compliance teams to help them deal with different complexities. It’s also important to remember the international dialogue that regulators are consistently part of. For firms with a global reach, we have an important role to play in responding to consultations either directly or via trade associations, thereby shaping the conversation around regulation such that changes drive real benefit for industry participants and end clients. By being proactive, this will contribute to the much-needed streamlining of how business is done on a global, cross-border basis.