INVESTOR PROTECTION - WHERE DO YOU DRAW THE LINE?

Wealth Management & Private Banking

Wealth Management & Private Banking

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Expert: Kevin Russell, SEI Wealth Platform

Facilitator: Daniel Gerber 

Key message 

Competing regulation aimed at improving investor protection has enhanced client outcomes but created unintended consequences for wealth managers and investors alike. Regulators need to create a common standard to reduce the challenges that private banks face while firms need to adopt better technology to keep up with reporting requirements. 

Headlines 

  • Increasing amount of regulation has improved trust in wealth managers but left a heavy burden on firms providing financial
  • A lack of guidance on disclosure methodologies has become a grey area for compliance departments within private
  • Client outcomes have improved on an overall basis due to investor protection measures although many investors are fed up with mountains of unwanted
  • Technology upgrades are needed in order for wealth managers to adhere to the upcoming disclosure requirements outlined in Mifid
  • Regulation such as the recent pension freedoms legislation has also brought new opportunities to wealth managers. 

Key themes 

The session started with a period of context setting around investor protection and the events that have driven the topic to the top of regulators’ agendas. Since the financial crash a decade ago, wealth  managers have experienced wave after wave of regulation aimed at improving consumer confidence through linking investment advice to client outcomes. 

The ongoing process of remediation has helped to rebuild trust in wealth managers although many challenges remain and are evolving in tandem with regulation. Several delegates highlighted the trade-off between the effort to promote transparency through directives such as Mifid II and the increasing amount of complexity that they bring. Competing initiatives from UK and European bodies caused one delegate to question whether the industry had reached ‘peak regulation’. Many delegates also called for the FCA to produce a common standard for wealth managers in the advent of Mifid II’s implementation  in 2018. 

Disclosure requirements were highlighted as a particular area of concern among several delegates. The new institutional standards for disclosure mean that data will need to be collated from different systems and departments within a firm. However, a lack of detailed rules or guidance on methodologies for ex ante disclosures has left wealth managers attempting to guess how to accurately disclose these. 

Moreover, delegates identified that providing costs and charges disclosures to clients before execution will impact the timing and profits of trades. Any delay in executing trades could result in an inferior client outcome which would be the polar opposite objective of what regulators are seeking to achieve. One delegate additionally highlighted that the 10% loss reporting ruling is challenging when trying to identify which products it applies to. Further discussion centred on the best methods of communicating costs to clients with one delegate asking if notional cost estimates should be provided at the opening of an account. 

Nevertheless, many delegates noted that increasing amounts of paperwork caused by regulation was potentially having an adverse effect on clients. The FCA’s shift from annual to quarterly disclosure requirements has resulted in common complaints from clients about getting more information than is needed. One delegate questioned whether the increased amount of disclosure documents was driving more interaction with clients although anecdotal evidence did not seem to substantiate this objective. Indeed one delegate stated that “80% of client complaints” related to the amount of information they were being sent. 

Several delegates encouraged wealth managers to quicken the pace of their technology upgrades in  order to keep up with increased reporting requirements. One delegate observed that IT departments within wealth managers were overwhelmed with the task of automating reporting documents. 

Another key theme behind investor protection regulation is the aspect of changing firm culture to become focused on client needs. All delegates acknowledged the influence of a firm’s culture on ensuring wealth managers provide suitable investment portfolios to clients and in a manner which benefits the end investor. One delegate identified that implementing this kind of culture starts at the top with executive management and filters down to relationship managers: 

“Every interaction, be it internal or external, is indicative of a firm’s culture.” 

Many delegates provided anecdotal examples of how wealth managers were instigating ethical codes of conduct across every business line and individual in their firms. Other delegates emphasised  the challenge of ensuring clients invest responsibly and cited situations where clients invested in a manner completely different to buying a house. The recent pension freedom legislation has seen increasing numbers of clients accessing large pools of saved assets and seeking to take on riskier investments than advised. 

Final discussion centred on the opportunities provided by investor protection regulation and the next steps that wealth managers should be taking in this field. Most delegates stressed the overall positive impact that regulation since the financial crisis has had on client relationships. It was also referenced that these measures not only protect end-investors, but also protect private banks from their own clients. Recent pension freedoms in the UK could mean that wealth managers may gain another 20 years with clients who require financial advice. 

Conclusions 

  • A common standard for investor protection across different regulatory bodies is necessary to minimise the amount of guesswork that wealth managers’ compliance departments have to
  • Increased disclosure requirements do not always drive more client interaction but can also produce masses of unnecessary paperwork for
  • Wealth managers need to adopt bigger and better technology as a means of keeping up with increasing amounts of regulation and producing suitable dashboards for clients

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