Having the capacity to devote necessary resources to keep pace with such an onslaught can be a drain on wealth managers. Outsourced solutions are becoming the norm, but this comes at a cost, both in capital terms and also with the risks associated in delegating responsibilities.
Andrew Surrey, head of relationship management, Pershing Wealth and Adviser Solutions, notes that there are currently some 90 pieces of major financial regulations his firm is handling across all the areas it works in. Among those most relevant in the UK are RDR, FATCA and MiFID II. Increased scrutiny and a tightening of rules in essential business areas, such as the FSA’s client asset sourcebook (CASS), are also key issues for wealth managers.
Increasing costs
Surrey says overheads for a wealth manager are a huge burden for groups with a turnover of less than £1m: “The £3m to £4m mark is when overheads as a percentage of profit drifts down and you start to get scale.
“However, over the past five years, we have seen overheads drifting upwards; costs are rising faster than revenues. This is, in part, due to consumers who are more cost aware, but also because of the increase in regulations,” he adds.
Tony Dunk, marketing director at St James’s Place, which conducts all of its compliance in-house, agrees compliance has increased significantly over the past ten years. For example, he points out that since St James’s Place launched in 1992, it has been self-regulated, under the Life Assurance and Unit Trust Regulatory Organisation (Lautro), which was then replaced by statutory regulation to the PIA before the FSA took over.
From April, the group will be regulated by both the FCA and PRA.
He adds: “Regulatory costs are not new and we regard high-quality compliance as an investment in our future. The costs have increased over the years, but bearing in mind some of the mis-selling that has taken place, this is to be expected as consumers need protection.”
One particularly costly area is the Financial Services Compensation Scheme (FSCS). Cynthia Poole, director of relationship management and business support at Raymond James, says levies are hitting firms hard. She notes the expense of the FSCS is unsustainable, but it is just one ongoing regulatory obligation and cost with which wealth managers must struggle.
“Lots of what we now face are not changes we can simply opt out of,” she says, adding that even if a current consultation does not, in the end, impact their business, time and resources must still be spent in order to ascertain that fact.
“It’s so prolific today; it wasn’t like this ten years ago. I don’t know how small firms do it.”
Richard Leigh, joint managing director at London & Capital and head of adviser solutions, also believe smaller firms are at a disadvantage when it comes to the pressure of added regulation and the growing demand to increase back-office and compliance capabilities. “With smaller firms, the cash flow is hit directly,” he says, adding that the more costs such as FSCS levies rise, the more groups must look to outsource.
Despite its relative size, London & Capital is not immune from the need for added resource in this area, having added two staff to its own compliance team recently as well as investing heavily in systems over the past year to shore up back-office capabilities.
David Symes, managing director of Compliance Recruitment Solutions, notes there are plenty of outsourcing options for compliance activities for wealth managers, small and large alike.
Striking a balance
There are the obvious consultancy firms, but today there is also a number of experienced compliance officers, some of who were laid off at the height of the 2008 crisis, which have set up one-man outfits as an outsourced service.
These did not exist ten years ago, Symes notes. But he believes such solutions should be temporary, as the need for knowledge is growing and the lack of such expertise in-house could be a business risk and can make for inefficiencies.
Surrey believes it is a fine balance and much is dependent on a company’s scale as well as its business goals. For a small company content to grow slowly, outsourcing responsibilities full stop can be sensible, even in the long term. But for a company attempting to raise its profits, outsourcing can become a drain, making it slower to grow operating profits, he says. He likens it to renting versus owning; eventually there is a tipping point where it becomes more expensive, either in cost or risk terms, to rent than it is to buy.
However, as compliance is not necessarily client facing, it should be among the last areas brought in, he argues.
It is not necessarily an all-or-nothing choice. A common approach for all types of wealth management today is to use a combination of in-house and external resource. Surrey said Pershing is seeing a lot of its clients bring in additional help to keep their businesses up-to-date with industry changes and requirements. This helps to diversify business risks as well, he adds. Companies need to make sure they have got it right as there is a risk of getting the interpretation of certain regulations wrong or being behind the curve and rushing to meet (or missing) implementation deadlines as a result.
Some outsourced arrangements, such as those surrounding CASS, also have a dual benefit. Not only do companies get needed expertise, but they are also outsourcing the risks and accountability involved in such areas of their business, Surrey explains.
That said, there are other compliance areas where companies cannot necessarily alleviate the regulatory accountability, but where an additional knowledge base is needed. For example, consultants can be used effectively with regulations such as FATCA, but the responsibility of being compliant remains in-house.
This is a trend already being seen among larger companies, where they are bringing in consultants or specialist firms to aid with specific pieces of legislation. For instance at Pershing there is an entire team who concentrate solely on FATCA, something most wealth managers would not be able to do.
Staff shortages
For companies that are looking to have some in-house compliance to handle the increase in regulatory scrutiny from existing rules, let alone the new ones, there is an added problem of is there enough resource to go around? Larger companies are looking to beef up their own teams in the face of similar issues and so companies are competing for staff from a rather stagnant pool of talent.
Salaries in the compliance arena had fallen by 2009, recovered by 2010 and since then pay hikes of some 30% are being seen in order to entice experienced, top compliance officers to move, Symes says.
Considering the need for competent and experienced staff in this area and the amount of responsibility such jobs entail, Symes has doubts whether there is enough personnel to meet current needs. Some of this is because of a shortage of junior compliance officers, as many companies appear unwilling to train up staff in this area, preferring instead to hire experience.
Symes says smaller companies are not necessarily disadvantaged in competing for top staff, despite the upward pressure on salaries.
Smaller companies can be more flexible and likely have less staff that potentially could be displaced due to new staff being brought in.
Among the skills or knowledge potential employers are keen to see are those familiar with financial promotions and CASS expertise, he adds.
