Wealth managers are used to regulations. Whole departments are in place to ensure compliance with complex rules, environmental standards, and simply to help ensure day-to-day operations run efficiently.
But despite years of collective experience on this front, every so often the regulator comes up with a surprise. The latest, introduced on 31 July, is the “Consumer Duty”, which “sets higher and clearer standards of consumer protection across financial services” in the words of the Financial Conduct Authority (FCA).
It is fair to say these regulations have already driven some fundamental changes in the way that wealth managers work. The market got the first indication of this when St James’s Place (STJ) cut fees for some of its retail investor products last month. Customers who have stayed invested for at least 10 years will see their product charge cut from 1 per cent to 0.85 per cent. The rationale for the price drop was that a ‘loyalty’ discount would fall within the auspices of new consumer duty regulations, where managers must actively look out for investors’ interests in relation to price and fair value.
The move drew some worried commentary from analysts. Numis’s David McCann said the cut marked a “significant departure” from St James’s Place’s usual practice of protecting fee margins. “Is this just the tip of the iceberg? [Will] other products also now need to offer discounts in the future?”
St James’s Place management also criticised the “subjective nature” of the Consumer Duty regulations. The drop to 0.85 per cent will cutits revenue margin by four basis points to 56 basis points, as per Peel Hunt forecasts.
The implication of the changes is that managers will have to guess whether products will pass muster under the new regime. This moves definitively away from a ‘rules-based’ approach that tended to view compliance as a checklist exercise in which all products must conform to specific rules on marketing and distribution – conformity to the letter of the regulation was all that mattered. The downside of this approach, as anyone with experience of box-ticking exercises will attest, is that products, communication and marketing can all meet certain standards in theory, and still be incomprehensible or confusing in practice.
There is some crossover between old and new regulation, however, and the changes could affect other parts of the investment management ecosystem. Peel Hunt analysts pointed to the potential for asset managers’ value assessments, in which they typically grade their funds’ value for money based on a traffic light system, becoming more important. Funds are given red, amber or green status, with performance balanced against cost. “We would expect [the new duty] to impact advisers’ willingness to recommend products given the challenge of proving why a good outcome is expected [for amber or red light products],” the analysts said.
Changing the regulators
The overall change in approach stems from the FCA’s adoption in 2015 of concurrent competition powers that placed it alongside the Competition and Markets Authority in terms of power and status. This puts the FCA in a position very close to that of a price-setting regulator. The enforced end of so-called ‘price-walking’ – upping the fees of loyal customers – in the insurance industry is one example of this.
Another interesting question is whether the new regime will lead to the faster consolidation of wealth advisers and managers, following recent takeovers such as RBC’s buyout of Brewin Dolphin. For large wealth managers, the costs of meeting the new requirements can be borne by their existing compliance infrastructure, but further down the pecking order it is a different story. Research from wealth manager Quilter (QLT) suggests that the average wealth adviser will spend around £18,000 on implementing the regulation, with around 44 per cent of those questioned expecting to see a fall in revenue as a result.
In Quilter’s own case, interim results show that a portion of the company’s variable costs for the first half increased by 8 per cent to £28mn due to it implementing the changes required by Consumer Duty regulations. On the pricing side, chief executive Steven Levin said the company’s existing tiered adviser fee system aligned with the regulation. McCann at Numis sees Quilter as a takeover target by either a bank (he suggests NatWest) or private equity buyer.
The sector is used to significant upheaval when it comes to the regulation of their industry, from both UK and, prior to Brexit, European financial services regulators. The Consumer Duty rules are but the latest in a long line of changes and are unlikely to be the last.
