The wealth management industry – along with the rest of the financial services sector – faces a continued flood of regulation, putting pressure on firms to tighten compliance controls, boost resources to tackle such rules while somehow remembering to serve clients effectively. The weight of regulation is often cited as a reason for the sector’s high cost/income ratios, as well as a driver of technology spending. So how can these sometimes contradictory pressures be handled?

To discuss these issues, delegates gathered last week for the WealthMatters conference in London, an event at which 250 people people. The conference was organised by ClearView Financial Media, the publisher of this website. Sponsors for the conference were Equipos, brt, Ossiam, Advanced 365, SPDR, MSCI, Vermillion, Finantix, KA Watson, Wealthmonitor; with support from APCIMS (now renamed as the Wealth Management Association) and ETF Strategy.

The compliance panel was entitled, How can current business models survive the growing onslaught of compliance and regulation demands?

Ian Cornwall, director of regulation at the recently-renamed Association of Private Client Investment Managers and Stockbrokers – now called the Wealth Management Association, spoke about the early months of the new Financial Conduct Authority, the UK watchdog that has recently created a special unit to monitor wealth management as a discrete sector.

“The early days of the FCA have been encouraging….we have had a reasonable level of engagement,” he said. One problem, however, has been that a number of high-level individuals have left the organisation, he said.

Referring to the sheer number of consultations, he said the “sausage machine” is still growing. “The number of ‘must read’ pages of regulatory material for wealth managers equates to nine pages every working day since the inception of the FCA,” Cornwall said.

“Europe is an area where, no matter how big you are, you don’t have the resources to keep track of what legislators are doing,” he said.

One of the problems that the UK faces is that its wealth management business model is very different to that on the Continent, he said, commenting on the likely impact of rules such as the second instalment of the MiFID rules that he expects to go through the European Union policymaking machine in some form.

A continuing worry, he said, is the relative lack of domestic national scrutiny of EU rules.

“A lot of the rules going into the FCA rulebook come from the EU without any impact or debate by members of parliament. It is only really in the last few months that you are seeing the UK Treasury taking action. People don’t understand that the game has changed in the last few years,” he said, referring to the impact of developments such as the Lisbon Treaty.

One of the issues discussed by the panel was the topic known as “attestation”. This term means, according to one definition, “The act of witnessing the signing of a document and then also signing it to verify that it was properly signed by those bound by its contents.” In the context of financial services, panellists said this term has arisen around the increased responsibilities – and roles – of persons such as non-executive directors of firms, including in financial services.

Concentrating the mind

Mark Spiers, head of wealth management at Bovill, a consultancy focusing on compliance and the financial services sector, noted, when discussing this topic: “There is nothing like a bit of responsibility for board members to concentrate minds on the client and regulators.”

A key issue is how far UK-based business models, and legal systems, can travel abroad, he said.

“In a strategic sense, our clients have been looking outside Europe to where the pools of capital are. The challenge is trying to take your business model and the way you set up your systems in a way that works beyond the UK,” Spiers said. “In Asia and the Middle East, there are more things happening on the consumer protection side, that influences the cross border risks and means firms need to consider how best to legitimately access those markets” he said.

 “The challenge for firms is making systems and controls replicable globally and that means going to the highest standard in whatever area you are in,” he said. “The UK is about as high financial crime as there is is…..it is at the leading edge. UK firms are quite well positioned to take advantage.” He spoke of the idea of “trust but verify” – an approach that should apply to firms and their subsidiaries.

 “Generally, if you look at where tax transparency is going, if you haven’t started to address it then you will have to address it at some point.”

“The regulators and politicians are like disappointed parents, we had an era of principles based regulation when we were allowed to play out and now we have transgressed and are being pulled back by the baby reins,” Spiers added.

Attestation

Harvey Dyson, an associate at Stephenson Harwood specialising in contentious financial services, spoke about the accountability of senior management; he also discussed the UK Parliamentary Commission on Banking Standards’ proposals which create further layers of regulation and the draconian and headline grabbing sanctions it has called for against banking misconduct.

Dyson said “it is not entirely clear where the FCA gets its powers to demand that firms and CEOs make attestations” in relation to recent speeches made by senior FCA individuals on the use of attestations by senior management.

Jonathan Wilson, project director for Europe, Middle East and Africa at Cordium, a consultancy focused on regulatory issues, outlined many of the features of the  AIFMD (the European Union’s Alternative Investment Fund Managers Directive), pointing out the sheer breadth and level of detail that the industry has had to take on board.

 “There may be some reduction in the number of funds to advise on,” he said, speaking of the possible consequences of the directive.

“The directive provides an opportunity for jurisdictions such as Luxembourg and Ireland (and the UK) to encourage fund management firms to put their funds `onshore’,” he said.

Reporting about systemic risks…..”It is going to be difficult for firms to get hold of all the data from a single source”, he continued.

“Lead times for implementation after EU consultation seem to be falling compared with UK led regulation,” Wilson added.

Click here to receive a complimentary issue of our new publication, Compliance Matters.