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THE FCA INTERVIEW: A NEW WEALTH MANAGEMENT POLICY

Chris Hamblin, Compliance Matters, Editor, 9 September 2013

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Recently CM interviewed Clive Adamson, the genial head of the British FCA’s supervision department and the creator of its new department for monitoring wealth management firms. He told us how well firms were responding to the retail distribution review (RDR), explained his reasons for forming the new department, and ranged over a wealth of compliance topics from technology and record-keeping to the eternal conflict (which he largely dismissed as non-existent) between the relationship manager’s compliance role and his naked need to make a profit. His fascinating take on the revelations of the Parliamentary Banking Standards Commission – he implied that the old Financial Services Authority mishandled the 2008 banking crisis because it lacked the right legislation to discipline CEOs – are to be found at the end.

Recently CM interviewed Clive Adamson, the genial head of the British FCA’s supervision department and the creator of its new department for monitoring wealth management firms. He told us how well firms were responding to the retail distribution review (RDR), explained his reasons for forming the new department, and ranged over a wealth of compliance topics from technology and record-keeping to the eternal conflict (which he largely dismissed as non-existent) between the relationship manager’s compliance role and his naked need to make a profit. His fascinating take on the revelations of the Parliamentary Banking Standards Commission – he implied that the old Financial Services Authority mishandled the 2008 banking crisis because it lacked the right legislation to discipline CEOs – are to be found at the end. 

CM: What led to the setting-up of a separate department to supervise wealth management? 

CA: The wealth manager’s always been within our remit. What we haven’t done historically is essentially separate them out from other broad IFA companies at one end or the banks at the other end. The idea is to have a new department to cover the broad wealth management private banking industry, partly because...there was a desire to be recognised in essence as a sector in their own right and partly, from our point of view, so we can better focus on that sector. I think the key point from our point of view was that we recognised that wealth management private banking is a large sector. It’s important in its own right. It does contribute quite significantly to the UK economy. We want to properly reflect that in how we supervise. 

CM: Was that your idea from start to finish? 

CA: Essentially, yes. I think a key point to make is that it’s quite a disparate sector [and they] find it quite difficult to define themselves. So we’ve been quite careful to say that it’s a broad sector [and] we don’t define it precisely. 

CM: What would you say is the biggest issue in front of wealth management in the UK at the moment and why? 

CA: The biggest is still adjusting to RDR because it does represent a very significant change to the whole advisory market of which wealth management is part. We think it’s time for firms to rethink their business models and we’re certainly in the early stages of that. 

CM: What’s your general sense so far about how well the industry is coping with RDR? 

CA: Generally, we think, well. I think from the viewpoint of looking at the key aims of RDR in one particular issue, professionalism, we are pleased that a very high percentage of advisers were ready in terms of...the must-haves. We’ve been actually pretty pleased with how firms have coped with it so far. 

CM: Are there any areas where you think there’s still work to be done? 

CA: Well, there’s a series of areas we’ll continue to look at. Part of it is actually how firms are adjusting their business models, which we’ll keep looking at. We will be looking at bit more [at] the growth of non-advice propositions and particularly the extent to which it is actually clear to buyers of these services that it is not advice. So we think over time there will be various new forms of distribution coming to the market. As a regulator we’re open to that – we like innovation. We’re still looking broadly at the issue of growth for inducements and the extent to which both the spirit and the letter is being observed in relation to...the RDR. 

CM: Is it tough enforcing the spirit, as opposed to the letter? 

CA: Errm, the message I’m trying to get across to firms generally – not just in this sector – is...that...the way we want to regulate and supervise in the future is not just about adherence to certain rules. It’s about doing the right thing for customers. So where we see practices which we think are at the margins of acceptability...we’ve really been asking firms, “are you really doing the right thing?” And that’s not just a question of enforcing it, it’s a question of the right level of engagement. 

CM: Like social pressure? Like the ‘raised eyebrow,’ as it used to be called? 

CA: Um...essentially. I wouldn’t quite use that phrase. But certainly we find that if you look at how the FCA wants to regulate, we want to use the soft power of supervision as much as the hard power of enforcement. A key point is that we’re about persuading, encouraging people to do the right thing. 

CM: How do you anticipate the knock-on effects of legislation that might not be desirable? 

CA: Our approach to that – whether it’s RDR or anything else – is that we spend a lot of time thinking through the direct and indirect consequences. We are bound to do what we call cost-benefit analysis and consider everything. It’s hard for the regulator to predict everything that might happen. So, for example, we keep hearing from the market that there is now less advice being given post-RDR than there was before. That’s possibly true because the major banks have essentially largely withdrawn from mass-market advice. 

Our view about that is that that is a decision that they make on the basis of their own economic models but it’s not...necessarily a bad thing. From our point of view, what’s important is that high-quality good advice is given rather than poor advice. We will be doing what we call a post-implementation review next year, just to more formally assess what’s happening with the RDR, what changes have occurred as a result of that. 

CM: Early next year, do you think? 

CA: I forget the dates. 

CM: Besides RDR, what would you say the other things are? 

CA: For the wealth management industry...by just setting up a new department focusing on that area, they’ll get more attention from us. That will be done through both what we call individual firm-level assessments, where we will be looking at firms by themselves... managing their risks but also we’ll also be doing more thematic cross-firm work. But some of the areas we think are highest priority for us [are] suitability [and] the quality of record-keeping. Beyond that, we are still interested in the quantity of client asset controls, to the extent that firms hold client assets, and as you go up the size spectrum of the customer, we’re increasingly interested in money-laundering controls and sources of wealth. 

CM: As you go up the size of the asset-management firm as well? 

CA: Yes. 

CM: How do you make sure that the people who are running these products [i.e. the wealth managers] are competent at what they’re doing? 

CA: We do look pretty hard. Certainly [we focus on] the wealth managers and the quality of their oversight over their own business. That’s very important. 

CM: It’s a great conflict isn’t it? The conflict between relationship managers being at the front line in compliance, having to gather all the detail and even having to do some low-level assessment themselves [when they are also] the very people who have to sell. 

CA: I don’t see that as a conflict really. The well-managed firms ensure their front-line people, whether private bankers or wealth managers, operate to the highest standard of integrity. So I don’t think we would see that as a conflict. It’s sometimes hard to make that happen at a firm, but I’m not sure we would see that as a conflict. 

CM: One issue that has really affected wealth management is technology – mobile devices, cloud computing, etc. That can sometimes have an impact on regulation too. Do you have any thoughts on that? 

CA: It’s a really good question. It’s something we [look at] broadly, not just for wealth management but retail banking as well. [We look at] the impact of new forms of technology on distribution and about how customers interact with firms. We’re not saying a huge amount yet because we’ve still got a lot of thinking work to do on it but it’s been an increasing topic for us. And you can start to see it in terms of the new entrants into the payments business in retail banking, who come more from a technology background rather than a traditional banking background. We can see that evolving over time into both markets. There are new forms of distribution, particularly around knowledge-based solutions – those [are] things we’re quite interested in looking at. 

CM: What global trend, would you say, is the most significant in terms of wealth management and regulation? 

CA: I think [in] the major jurisdictions of the wealth market - the US, London, Switzerland and Singapore, there’s one obvious trend which is that it’s a growing market, a growing business. 

CM: And the people with the wealth at the top are getting wealthier and wealthier disproportionately to everybody else as well. 

CA: Yes. I think there’s a growing sophistication, particularly as we go up the wealth curve. There is a greater use of different sorts of products, particularly some products that were traditionally sold to institutions by some investment banks that are now going into the wealth market. [There is also] much greater focus globally on AML. 

CM: Have you ever thought about cancelling [ultra-high-net-worth individuals] out of the conduct-of-business rulebooks altogether, and saying “when you get past such a level, when you’re super-rich, we cancel you out”? 

CA: It’s a good question. That’s been raised with us, as a philosophical point. Why are we concerned about wealthier people? And our answer is that we think that there are basic standards that should be applied to everybody. 

CM: On the subject of whistle-blowers, do you look at how a person who has a worry can express it without finding himself out on the street? There are issues about client confidentiality and good governance, so it’s not a straightforward subject, is it? 

CA: Currently not terribly, I’d say. But we do want to encourage whistle-blowing. At the parliamentary banking commission there was reference to the need to protect whistle-blowers more. 

CM: The FSA has gone after the IFA sector for the Arch cru problems and it’s driven some IFAs out of business but at the same time it’s not had a Pensions Review-type exercise to clear up the vastly more important PPI problem. How [does] the FCA justify the disparity between those two things? 

CA: I don’t think we see it as a disparity. I think in Arch cru we got a pot of money out of people we felt could contribute on a voluntary basis. It contributed £54 million. That is different from the action that we took in respect of the advisers and distributors [and we allowed investors to get redress from them in] the Arch cru section 404 scheme. Through a combination of that and the Arch cru payment scheme, we felt that that was the most effective way to supervise redress. 

CM: The Parliamentary Commission for Banking Standards criticised the FSA for (a) allowing bank senior managers to hide behind an ‘accountability firewall’ by giving responsibility for major jobs to people without ‘approved person’ status and for (b) accepting the ‘Murder on the Orient Express’ defence (‘everybody was doing it’) as grounds for not taking enforcement action against senior management. What is the FCA going to do to avoid that charge? 

CA: It’s for the Treasury to replace [or] make any changes in the legislation that come from the parliamentary commission, so we’re in the process of responding to the Treasury and we’ll see what the Treasury wants to do in terms of legislation. We are very keen to emphasise the importance of senior management responsibility. It’s complex how one does that, so we’re working out the practical bits of that.

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