In recent years, the UK wealth management sector has seen a tsunami of new regulation, with more to come. The cost of compliance is shaking up business models, but does this bring opportunities as well as challenges? CEO of the Wealth Management Association Liz Field looks at how regulation is changing the way wealth managers operate and what it means for their clients.
These are testing times for the UK's wealth managers. Faced with tough regulations that are poised to become tougher still, firms are finding their margins under pressure and their business models under threat.
As costs continue to spiral, many are becoming vastly more selective about who they take on as clients. A study conducted by Wealth-X for the Financial Times found that private client wealth managers had raised their minimum investment levels by almost half between mid-2014 and mid-2015. With lower-income clients bringing in lower fees, a third of the firms surveyed said they would not admit clients with less than £1 million to invest. For Liz Field, CEO of the Wealth Management Association (WMA), this is far from a surprising development.
"The majority of our firms are small or medium-sized, so their bandwidth is not huge and they have to look at their business model," she says. "How do they meet these different challenges? What is their market? What are they in the business of? What do they want their market to be?"
WMA is a trade association representing 110 wealth management firms, along with 76 associate members. Founded in 1990 as the Association of Private Client Investment Managers and Stockbrokers (APCIMS), the association represents the interests of the UK investment community; and advocates for the sector with governments, regulators and the wider financial services community. It aims to influence policy to the benefit of WMA members and their clients, and to provide support in the face of oncoming changes.
"Our members range from IFAs with discretionary permissions, execution-only stockbrokers, discretionary fund managers, full-service brokers and advisory firms right the way through to private banks, and everything in between," says Field. "We represent investment management firms and their clients, so when we're looking at regulation, we also do so through a client's lens, asking how this is going to affect the private investor. We've got that dual focus to our work."
Right now, the members in question have plenty on their minds. As Field points out, the issue is not just new regulation; it's the need to attract future clients and invest in new technology. There is also a strong focus at the moment on the client experience and how that interaction can be improved, as well as cost-effective servicing. "That involves some analysis and review of their business model, asking, with all these cost pressures operationally, what that means?" she says.
A complex web
The regulatory side, however, is what's causing the biggest headache. Since the financial crisis, there have been a number of regulatory reforms, most notably the Retail Distribution Review (RDR) in 2013. Banning commission payments from third-party product providers, these reforms enforced new cost disclosures and required wealth managers to charge direct fees and through dealing commissions.
Along with existing money laundering, data protection and client assets sourcebook (CASS) rules, RDR has had a major impact on the way firms conduct business. Many smaller independent financial advisers (IFAs), unable to support compliance costs and technology spend, have merged to better weather the storm.
There has also been a surge of regulation in Europe. Following the Lisbon Treaty, European regulations can be enforced in the UK without any influence at a national regulator level. Recent examples include the Capital Requirements Directive IV (CRD IV) and the Markets in Financial Instruments Directive (MiFID), which will be supplanted by MiFID II in 2017.
"There's a lot about MiFID II that's still unknown because the final text has not been written," says Field. "We're still waiting for that and also then there'll be some local interpretation from the Financial Conduct Authority [FCA]. We're not likely to get final confirmation of some of that until the early third quarter next year."
Because of the uncertainty of the wording, the timescale for implementing MiFID II is likely to prove a tight squeeze. As things stand, firms will have just a few months to put the necessary changes in place - a demand the WMA has already flagged as unrealistic.
Factor in other financial service regulation from further afield - such as the Foreign Account Tax Compliance Act (FATCA) from the US, and the international Common Reporting Standard (CRS) promoted by the OECD - and it is easy to see why some firms are feeling swamped.
"There's a lot happening in a very short period, which is impinging on business-as-usual," says Field. "I don't think anyone's really sure how these pieces are going to fit together, but they're all moving and moving quite fast. That's the environment wealth management is working in at the minute."
In the midst of these challenges, the WMA is working hard to engage with regulators domestically and abroad.
"A third of my resources are spent in Europe, and we have a team that's based there," says Field. "They've spent the past five years in Europe looking at the regulations and emerging policy, working very closely with different parts of the EU and educating them about how the wealth management space in the UK and Ireland is unique. It's different to mainland Europe, which is mainly a bancassurance model.
"We have been at the coalface, informing the policymakers about the unintended consequences of some lines of text and getting some text removed that would have had seriously adverse effects on the market. We spent a lot of time reading and challenging interpretations at a European level and at a domestic level too."
When it comes to MiFID II, the WMA has conducted a line-by-line textual analysis, applying a wealth management lens to the wording and pointing out possible consequences in different scenarios.
"We're just looking, challenging, providing questions, and giving those to the FCA and Treasury, then taking it to Europe," says Field. "Hopefully, through a pincer movement of challenges and questions, we can start to get some answers to what is meant by a line of
text but also influence the way the text is written. We won't know that until the final document comes out."
In parallel, WMA has been looking to share the fruits of its analysis with its member firms. During the FCA's first year, WMA estimates its members would have had to read over 3,500 pages of regulatory material, not including the text of speeches and final enforcement notices. This volume - unlikely to change in the foreseeable future - means any guidance that can be provided will surely be well received.
While this is undeniably a challenging time for the UK's wealth management community, recent disruptions may also create some significant business opportunities. The Prospectus Directive, for example, has been pegged as enabling a thriving retail bond market.
"We've been talking about the removal of the €100,000 threshold on the retail bond market, which currently means only very wealthy clients can move into that space," says Field. "At the moment, you have to have a different retail and wholesale perspective, which is quite expensive, and we've been asking for a unified prospectus for both. We're hoping to see some movement there at a European level, which we think will be really encouraging and a good thing for the market."
Another promising development is the Financial Advice Market Review, launched in August 2015, which will examine how financial advice could work better for consumers and examine the so-called 'advice gap' for less wealthy clients. Led by the Treasury and the FCA, it will report ahead of the 2016 budget.
This will bring different forms of client engagement to the fore. For many wealth management firms, the average age of the client base is around 65. The question then becomes who the next clients are, and how do these firms go about appealing to millennials, particularly with regard to socially responsible investment?
"There are many firms in the wealth management space that want to be able to offer a service and fill the advice gap, and I think the Financial Advice MARKET Review will throw up solutions via a mixture of personal contact and the use of technology.
"The landscape for pensions is also changing. These days, pensions are viewed more as a matter of active investment than as something you passively succumb to. This is shaking up the market in a way wealth managers need to address.
"Our firms are looking at that very actively," says Field. "Pensions are now about being involved in investing for the future, and wealth managers have a very active role to play there because they have the experience of long-term, socially responsible investments with their existing clients. So there's a huge opportunity, and there's got to be something more that firms can do in that space."
A final piece in the puzzle is the Capital Markets Union, which has been proposed by the European Commission as a way of boosting economic growth and employment across the EU. Although it is still early days, WMA is involved in discussions about what this might mean for retail investors. Not content with taking a short or medium-term focus, it is also already thinking about the MiFID II Review, which is due to start in 2019.
One thing is for sure, if you're a UK-based management firm, now is not the time to relax. There are interesting, if tumultuous, times ahead. Field thinks that despite the plethora of changes in store, most firms have what it takes to go the distance.
"The thing about the UK wealth management sector is it has global reach," she says. "It's no accident that international clients want to do business in the UK with UK-based firms - wealth managers are highly professionally qualified, and the sector is seen as very well regulated. It's got an astounding reputation, and I think it should stand itself in good stead."
Overall, Field is positive about what lies ahead, pointing out that whatever happens, this is a dynamic and fascinating part of the industry to work in.
"Will the moving pieces ever stop? I don't think necessarily that they will," she says. "But our firms are actively engaged in working out what the future looks like and how they can respond. They're not being complacent. There are a lot of interesting things emerging in the market, so I think, watch this space."