City View: Roll back the red-tape tide

Britain’s wealth management and private banking industries enter 2015 in good health. A recent survey by the British Bankers’ Association, A Wealth of Opportunities, revealed that the sector oversees some £524 billion and contributes £5.5bn a year to the economy

As well as directly employing around 23,000 people, it supports the employment of another 42,000. Compeer, the research firm which has a good part of the UK industry under its (confidential) microscope, reckons the industry saw record pre-tax profits in 2013 of some £1.4 billion.

Costs, though, began to rise in 2014, and some firms faced particular difficulties. Chief amongst these cost rises for most firms was compliance – no surprise to any industry participant.

Since it opened for business almost two years ago, the Financial Conduct Authority (FCA) has honed its reputation for being tough and levying huge fines. Just before Christmas, its outgoing chief of supervision acknowledged in a Parliamentary hearing that the FCA may have “gone too far” in its aggressive stance. Combined with a never-ending flow of new regulation from London, Europe and the US – et al – complaints about the strain are bound to mount.

Wealth managers, whose focus is on individuals, are badly served by being lumped in with ‘banks’

Nobody doubts the paramount need to protect consumers, and to ensure the fair and effective operation of markets. Wealth managers, whose focus is on individuals, are badly served by being lumped in with ‘banks’, the source of scandals, which have lost much trust and prestige in recent years. Even in a digital age, the wealth managers have a much more intimate, personal relationship with their clients, not least because all their customers can clearly see how well or badly their advisers are performing, certainly year on year, against a number of measures.

SuitabilityTopping the regulatory requirements right now, and for most firms the recent workload to meet them, is Suitability – the exercise by which wealth management firms must assess the circumstances of every new and existing client to ensure that customers’ portfolios are invested in suitable products and services. Suitability is very important, introducing more objectivity into the process of weighing up clients’ needs, with ‘fact find’ and ‘risk appetite’ exercises.

Wealth managers are not anti-regulation per se - 83% in the March 2014 Compeer survey regard suitability as “good business practice.” The devil is in the detail, and the eye-watering volume of it. Andy Haldane, Head of Financial Stability (and chief thinker) at the Bank of England has argued forcefully that the “red-tape tide” must be turned, for three reasons. First, complex regulations are expensive; no reasonable person can question that. Second, Haldane argues, complexity doesn’t work. “In filling in old cracks,” he says, “complex rule books tend to open up opportunities for new ones to emerge. Indeed, they may increase the likelihood of new loopholes or workarounds emerging.” Simple rules make good sense. Finally, complexity gives an advantage to larger firms - it acts like a regressive tax, and gives lawyers a bonanza.

There is a suspicion and fear that the requirement to address Suitability within a short timescale is leading to a lack of focus on clients’ investments. This hits revenues (as a couple of firms have admitted) and more worryingly, it may mean that some portfolios are not being optimised to take advantage of or gain protection against current market volatility.

Technology opportunitiesTo help address some of the problems, FCA has been actively encouraging technology developments in our industry; online is here to stay, and is developing rapidly. While the regulator has made it clear that there is “no such thing as simplified” with Suitability, and that complaints would lead to fines down the line, it has acknowledged that “some firms are uncertain on the suitability standards for delivering personal recommendations online.” It is giving further clarification on this.

Technology provides a real chance to serve properly the affluent and mass affluent markets in this Suitability sphere, and elsewhere, with revenue potential the simple next step. Technology, as in so much of finance, has the potential to change all of our lives – firms’ and clients’ – for the better, and sooner than many expect. More red tape will only slow progress, or, worse, put it into reverse.


Published: 22 Dec 2014
  • Compliance, Regulation & Risk
  • The Review
  • Opinion
  • suitability
  • red tape
  • City View

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