Regulation Puts Squeeze On Global Wealth Industry - RBC/Capgemini

Tom Burroughes

19 June 2013

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.

“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.

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.

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

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.

Europe

Themes of financial stability and investor protection have seen measures such as Part II to the Markets in Financial Instruments Directive , 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.

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.