The 2008 crisis signalled an urgent need for the financial world to make fundamental changes, but some wealth managers are eyeing upcoming regulatory fetters with anxiety.
Financial services in the UK are still feeling the ramifications of the Financial Conduct Authority’s (FCA)
Retail Distribution Review (RDR), introduced at the end of 2012. This set of requirements pushed for greater transparency in advising and reporting, marking a valuable move towards openness with clients. This was, of course, a difficult principle to argue against in an industry still hounded by gross feelings of mistrust.
Financial services are now also gearing up for the Europe-wide Markets in Financial Instruments Directive (MiFID) II, due in 2017, which aims to strengthen investor protection even further. MiFID II is regularly dubbed ‘Europe’s answer to RDR’, but this does not mean that the UK will face an easy ride when it finally sweeps into its financial sector.
In fact, some wealth managers are already concerned that this wide-ranging regime will overlook certain idiosyncrasies of the UK market.
Through the fogThe Wealth Management Association (WMA) has been quick to point out inconsistencies and generalisations in the upcoming European directive. Ian Cornwall, the WMA’s Director of Regulation, has been involved with a multi-pronged project to help firms to prepare for the challenges they may face, and add clarity to these more ambiguous rules.
“What we want is smart regulation, not a one-size-fits-all approach,” says Cornwall. “It needs to be rational. It would also help to form a clear overarching aim to work towards, instead of having lots of piecemeal changes.”“It undermines the credibility of the whole process if you get decisions made that appear incorrect to the industry”
Because of this, the question on many wealth managers’ minds is: will they gradually lose their ability to provide bespoke services in favour of standardised solutions? “The detail underpinning MiFID II has yet to be clarified in many areas, but we do not believe it will result in the end of firms offering bespoke services,” says Cornwall.
He continues: “I think there’s a lot of work to do around communicating with clients, to find out what they would find useful. Lots of these rules, when you look at them in detail, contain seemingly arbitrary requirements that we don’t think most clients would really value.
“We’re struggling with MiFID II’s requirement around cost disclosure, for example, to understand which details we need to include in the reports they’ll receive – we’re not clear at the moment what format those reports should take.”
All at oddsThis fuzzy sense of what they should and should not do may leave wealth managers feeling uneasy. As Cornwall says, the ‘generalised’ approach is hard to push back on: “The European legislation has been designed to satisfy 28 countries, so it’s difficult to explain why a UK setting may not suit it.”
One regulatory quirk that the WMA is finding particularly difficult to digest is MiFID II’s new definition of complex instruments, which will now also cover investment trusts. This means that people who want these instruments on a non-advised basis will be subject to an ‘appropriateness test’, which the WMA worries could create unnecessary costs.
28
The number of countries that the European legislation has been designed to satisfy.
“This is totally illogical,” says Cornwall. “It’s a quirk of the European drafting that these are deemed complex. Certain investment trusts do have some complex characteristics, but there are large numbers of investment trusts that aren’t complex instruments at all. For decades, they have provided a mechanism for small retail savers to gain exposure to the stock market.
“It undermines the credibility of the whole process if you get decisions made that appear incorrect to the industry,” he adds.
Survival of the fittestThere is no doubt that wealth managers have their work cut out to make sense of what they are required to do. But the overall picture may not look all that bleak, and UK wealth managers may even be able to benefit from the changes.
David Clarkson, Partner at Oliver Wyman’s Wealth and Asset Management Practice, urges wealth managers not to worry about losing their ‘bespoke’ services. “I suspect this may be an overreaction,” he says. “The reality is that clients of high-end wealth managers expect and demand a bespoke and customised service – without it, they would look elsewhere. We therefore expect wealth managers to enhance processes, advice and record-keeping as they get more comfortable with any new regulation and as they continue to provide tailored support.”
In fact, a new report by Oliver Wyman suggests that the delivery of bespoke solutions will continue to be an important focus for wealth managers, particularly asset managers, in order to best serve their clients.
And, for Clarkson, this is not a simple pipe dream – he believes wealth managers are in a prime position to grab growth opportunities. “I think UK players have had time to adapt and improve their offerings in light of RDR and other changes,” he says. “We suspect that this may place the UK wealth managers ahead of the curve compared with continental players, and present opportunities to gain share with more offensive growth strategies, while other players potentially seek to defend and ring fence past practices and economic models.”
Like the WMA's Cornwall, Clarkson feels that client-led services will ultimately stand the best chance of succeeding. “By placing the client at the centre of their business models, wealth managers will be able to create stickier, more trusted and more mutually rewarding opportunities,” he says.
This client focus, after all, is what financial services professionals should all be aiming for.