The rising level of financial sector regulation means that fewer firms will be able to offer the full suite of wealth management products, according to the RBC/Capgemini World Wealth Report.

The rising level of financial sector regulation means that
fewer firms will be able to offer the full suite of wealth management products,
while cost-income ratios will likely stay high although they have flattened off
in the past year or so, according to the RBC Wealth Management/Capgemini annual
report on the industry.

The World Wealth
Report 2013 document includes a study of regulatory and compliance trends
in a sector hit by rising client demands, uneven economic growth and a rash of
scandals such as LIBOR-rigging and anti-money laundering breaches.

The comments strike a largely sobering note compared with a
generally upbeat survey of rising wealth trends in most regions of the world in
2012. (To view the main report, click here.)

“The volume and pace of regulatory change is the single
largest challenge facing wealth management firms, creating significant and
increasing costs related to both compliance and non-compliance, and constraints
in delivering an integrated client experience,” the report said.

“For wealth management firms already struggling to
rationalize still-depressed, post-crisis levels of assets under management
against rising costs, the growing regulatory burden presents a significant challenge,”
the report continued. “Though leveling off, firm cost-to-income ratios have
been on the rise since 2007, increasing from 63.7 per cent to 80 per cent in
2011,” it said. (Source: Scorpio Partnership.)

The mounting weight of regulation is driving industry
consolidation, changing service levels – sometimes cutting them – while firms
can sometimes use the challenge to reshape business models in a profitable way,
it said. (As examples of industry M&A, there has been the sale by Bank of
America Merrill Lynch’s non-US wealth arm to Switzerland’s Julius Baer, and the
purchase by Credit Suisse of some wealth management operations of Morgan
Stanley.)

The report, while it does not contain much raw data, sets
out the sheer range of regulatory activity in one go:

US

Among a raft of measures has been the Dodd-Frank Wall Street
Reform and Consumer Protection Act, described by the report as “unprecedented
in size and scope” and which includes a “breathtaking” amount of change
covering a wide range of financial fields. Other notable changes include the US
FATCA Act – now a familiar term to readers of this publication – which is
designed to prevent overseas tax evasion by US expats. “Given the significant
anticipated costs and challenges, several firms have decided to limit or halt
services to US
clients, leading to a narrower choice of wealth managers for US citizens,” the
report said. (Interestingly, RBC Wealth Management has told this publication
that it continues to offer services to US
expats, benefiting from the Canadian bank’s SEC registration status and North America expertise.)

Europe

Themes of financial stability and investor protection have
seen measures such as Part II to the Markets in Financial Instruments Directive
(or MiFID II), which is designed to shield consumers from unsuitable products
and boost transparency. The Alternative Investment Fund Managers Directive is a
measure – taking effect from July this year – to tighten regulation of vehicles
such as hedge funds, requiring more detailed reporting, due diligence, while
also creating a “passport” system for such funds in the EU.

Asia-Pacific

Regulatory activity has accelerated in the region although
it was less adversely affected by the 2008 financial crisis. In Australia, for
example, a package called The Future of Financial Advice addresses pay and
looks at consumer protection measures.

In Singapore,
the Monetary Authority of Singapore has introduced steps to tighten standards,
such as rolling out a code of conduct for the private banking industry, to
raise standards of competency. The MAS has also signed offshore tax agreements
with other countries to exchange data on potential tax evaders. Under Financial
Action Task Force recommendations in 2012, Singapore will change tax laws from
July 1 this year to make laundering of money laundering a criminal offense.

UK

As many industry practitioners know, the most familiar
acronym in their sector is “RDR” – Retail Distribution Review. The measures
under RDR are designed to stamp out use of trail commissions and raise the
level of professional training and qualifications among advisors. The UK has
a new regulatory architecture to replace the old Financial Services Authority,
in the form of the Financial Conduct Authority – protecting consumers – and the
Prudential Regulation Authority – which monitors risks in the financial system,
such as banks.