Navigating the great wealth transfer

In June, "keeping up with regulatory changes" was identified as the top threat facing asset management businesses in FE fundinfo’s recent Asset Managers Report. 41% of 100 senior asset managers considered the risk greater than even pressure on margins, costs, or tech disruption, including AI. Phew.

The challenges of keeping up

The first problem with “keeping up” is that even the notion is multi-faceted. There’s keeping up with high volumes of regulatory information; having enough time for skilled staff to interpret it all; understanding implications for your business; making actionable plans; and not least, actually getting change done.

The regulatory burden has grown exponentially. Rulebooks have become behemoths, consultation papers and guidance ever more voluminous and more frequent. We are living with a complexity overload that doesn't benefit consumer outcomes, the industry, or even the regulators having to wrangle the cumulative burden themselves.

From large to small

The burden of compliance can be daunting and for smaller asset managers, who bring market diversity but with fewer resources, this regulatory complexity is particularly challenging. At least with the Consumer Duty, with its focus on outcomes rather than just duties, we have a step in the right direction by using plainer language around regulatory goals.

Hope on the horizon?

Will the Edinburgh Reforms make things better for you in the near future? Whilst we may benefit in SMCR, investment research, listing, and ESG, to be honest, they are unlikely to improve the problems discussed here. Without a sorely needed broader simplification ethos, the burden of keeping up is unlikely to ease soon.

What to do

A word to senior management: for every long hour your in-house team is wading through base regulatory information, they aren’t focusing on monitoring and keeping consumers and the business safe, account opening, and improvements to name but three. There is a significant opportunity cost. Getting expert policy advice, briefings, and most critically of all, usable, actionable project plans, templates, and gap analyses at a fraction of the cost of a junior headcount should be a cost-benefit analysis that simply makes sense.

Current regulatory risks

Let’s note some of the things that should already be in focus. If they aren’t, then that’s a prompt to reach out for help.

Boards should be actively discussing the FCA's self-declared more aggressive and proactive stance which is certainly coming to pass. As a "data-led regulator," the FCA is taking in ever greater quantitative information through surveys and visits. Non-normal data relative to your peers is likely to prompt further scrutiny - do you know where you stand on multiple key metrics, not just price?

"The regulatory burden has grown exponentially. Rulebooks have become behemoths, consultation papers and guidance ever more voluminous and more frequent."

Expect to be asked for your management information and how it drives your board’s Consumer Duty oversight, which must be minuted clearly.

Investors work incredibly hard to get their portfolios right, but in so many businesses, it’s the evidence of investment decisions and Investment Committee oversight that is insufficient. The FCA is taking greater interest in model and portfolio level issues - have you had those objectively reviewed?

Financial crime risks, such as scams, frauds, and money laundering are also in focus.

Boards should already be monitoring vulnerability criteria, processes, and statistics in every senior management and board meeting. Ensuring accurate and consistent MIFIDPRU reporting is crucial. You’ll know about SRI, ESG, and greenwashing, but can you show how you’re managing it through dedicated projects?

How regulatory risk shows up in today’s asset management businesses

One of the privileges of working with a diverse set of firms, and being well integrated in the flow of regulatory information, is that we get to witness and experience a great deal. Our regular health-check audits and reviews are expert at identifying pain points.

By and large, integration of Consumer Duty has been well embraced. Whilst the Duty gives firms lots to do, some of the largest practical challenges are understanding peer group pricing and knowing how to conduct high quality assessment of price and value; assessing vulnerability; and creating the right MI to allow the board to assess and manage its Consumer Duty obligations.

There’s widespread frustration that pricing transparency is generally opaque and / or expensive to obtain. But price and value are not simply a relative game. You are as likely to face challenges on internal pricing consistency. If a client could receive two alternate asset management solutions run by you in the same risk category, how have you justified any price difference between the two? The client contracts with a firm - not an individual adviser or investment management team - personal discretion will not acquit a firm of its regulatory duties. For firms acquiring multiple distribution businesses, this may be particularly complex.

With vulnerability, some feel that what would profit UK financial services the most is industry-wide agreement on how to assess it on a fixed set of criteria. However, this is but a pipe dream. The FCA has said it doesn’t believe it is possible to produce such a list because vulnerability is an ever-evolving topic. Therefore, everyone is having to feel their way on which criteria to use, even with guidance. As society changes, new vulnerabilities may emerge.

On management information driving Consumer Duty evaluation by the board, this is one of the areas where firms often need to take a step further. Consumer Duty is not just about principles or rules for conduct, it is about ensuring that the outcomes are actually being achieved in real retail client relationships. Too many board reports lack detailed metrics which aggregate to show how each outcome is being measured against pre-established targets. MI packs should let the board assess absolute and relative (to peer) trends in their data and take consequent actions. Board minutes should show active discussion, challenge, and the instruction of change. Do yours?

On ICARA and MiFIDPRU reporting, the risk is, of course, using the wrong numbers, or making the wrong interpretation of the guidance. In the real world, our experience is that most reviews identify issues, so here we will simply say that complexity, expertise, and resource are the risks, and that the issues are real.

On investment governance, it is still too common to see a lack of expert (not generalist) compliance input in this area. The creative, valuable, and, let’s face it, fun parts of Investment Committees - coming up with new ideas - can crowd out the agenda points covering challenge and oversight. Agendas are often weak on compliance and risk, and inadequate investment decision record keeping creates complaint risk. FCA scrutiny in this area has been on the increase.

Lastly, the overriding meta-risk: that in a very complex arena, you don’t know what you don’t know. You are probably getting a large amount of your regulatory obligations right, but it’s the complexity, the unknown unknowns, that will hurt you most. So, how do you close that risk down?

Practical steps to mitigate regulatory risk

It's now time to turn to the practical, actionable steps firms can take to mitigate those risks and build resilience.

1. Prioritise regulatory intelligence

The pace and breadth of regulatory change can be overwhelming but change requirements can be distilled into actionable steps. Ensure you have robust regulatory intelligence for your business that involves not just tracking new regulations but identifying their implications and providing actionable analysis tools and recommendations.

We’ve previously established that your senior team members are unlikely to have the significant amounts of time required to do this well and your more junior personnel will not have the necessary experience yet. Outsourcing, where you can gain the insights of very senior and experienced teams, but on a fractional cost basis, should be a simple cost-benefit analysis.

Make sure your board has a regulatory timetable for the next twelve months and knows how the firm will address all the items coming up well ahead of time. Keep status, progress, and action items tracked from board meeting to board meeting.

2. Conduct regular, objective, compliance audits

Given the complexity of the regulatory landscape, it is essential to regularly audit your compliance processes and your firm’s ability to withstand scrutiny. These audits should cover all aspects of your business lifecycle including client take on, AML and financial crime prevention, advice, investment management, ICARA and wind-down processes and, yes, Consumer Duty, among other areas we’ve discussed.

Ensure you receive ongoing objective input. Most of us are so occupied with the demands of our individual businesses that we have time to experience little else than what we already know. While much, perhaps a great deal, of what you do will pass muster, it is what you don’t know you don’t know that can really hurt.

Make sure you are fully covered on investment compliance related matters. The FCA has been increasing its scrutiny of model/strategy /investment issues, its review of manufacturer products and services, and its examination of price and value work. Are you getting objective input on all these manufacturer requirements? Are you aware of best practice in investment committees and investment governance? Or are you receiving generalist compliance coverage? The latter can be worth its weight in gold elsewhere, but it does not cover these areas adequately.

3. Embrace and embed MI

The FCA is now a “data-led regulator.” Where you submit non-normal numbers in increasingly quantitatively driven returns, expect to see follow up. The regulators will likely ask to see recent board minutes and the management information (MI) that feeds the board.

If asked to explain your approach, you should aspire to simply hand over your MI, analysis, board minutes, and action items to evidence your strong governance and control. If it doesn’t pre-exist in writing when the inquiry comes, life will become exponentially harder.

A quick check: does your process look something like the following?

Standardised MI inputs and data

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Analysis versus internal and peer group targets, KPIs and KRIs

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Board assessment and challenge of attainment or shortfalls in desired business and consumer outcomes

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Prioritised and tracked action items

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(Results in) objective evidence of strong governance and compliance. If not, seek external advice how to get there as soon as possible.

4. Utilise technology wisely

Vendor technology services can provide deep functionality in vulnerability, customer surveys, risk analysis, investment models and content, AML, and financial crime to name but a few. Again, it is very hard to know what is available when you are so focused on the day job. Frequently, such services will save you time and money and elevate your insights and standards.

5. It’s free to ask

It generally costs nothing and requires little time to have a conversation and find fresh ideas and information on current best practice in all of the above. Experience of many years shows that you are highly likely to discover something - or several somethings - where current in-house accepted practices need updating and/or you gain new insights into current regulatory focuses which were not in view of your board and management team before.

In conclusion, regulatory change is understandably a big concern, it can be tackled successfully. You explain the benefits of specialist expertise to clients all the time and so it is here too. Expert intelligence, with experienced objective audits, dedicated service support, and strong technology solutions can - and will - take away a great deal of the pain of regulation and regulatory change.

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