Invest

Staff Up or Outsource? Contending with Increased Regulations of the Wealth Management Industry

6 June, 2017
  • Adeline Tan

    Head of Investment Advisory, Mercer | Hong Kong

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“Technology and cloud computing allow wealth managers to remain competitive, improve processes, enhance service offerings and improve distribution.”

Regulations fostering greater consumer protections, tax transparency and better conflict and risk management are being implemented across the globe. Experience in markets where changes have already taken place suggests that wealth managers must adapt their business models, often at reduced profit margins, to survive. With these changes on the horizon in Asia, the region’s wealth management industry will need to find ways to adapt.

Regulatory compliance will be the Asian wealth management industry’s biggest focus for strategic spending over the next few years. The region expects to spend 42% of strategic budgets on regulatory compliance, whereas the US expects to spend 10% and Europe 13%, largely because many countries have already transitioned into new regulatory regimes1. The relative youth of Asia’s asset management industry and increasing age of its populations point to more regulations designed to protect consumers in line with what has happened in the US and the European Union (EU). Asian wealth managers can learn important lessons from how wealth managers have responded to similar changes in other countries. Fundamentally, Asian wealth management firms should prepare for increased scrutiny and decide whether to outsource compliance or bulk up their staff to avoid problems and/or penalties.

Transparency in fees and investment advice is the most important aspect of potential regulation from a client’s and regulator’s perspectives. A global CFA survey in 2015 showed transparency in fees/commissions was the most important driver of client trust in investment firms2. We can expect regulations similar to the new US Department of Labor Fiduciary Rule of 2016 that requires advisors to work in their clients’ best interests and disclose revenue arrangements clearly. Such a regulation could encourage advisors to offer simpler advisory arrangements, especially where retirement assets are concerned3. Additionally, this kind of regulation will promote competition, which could result in lower wealth management fees and put pressure on revenues.

Technology is helping to democratize the investment industry by giving smaller investors access to more investment options. This development is happening globally, including across Asia. These changes make client acquisition easier and cheaper; however, they also make regulators anxious, leading them to further emphasize consumer protections and ensure certain suitability standards are met. We expect to see more regulations around fiduciary responsibilities in selecting products and new disclosure requirements for product providers. For example, the Hong Kong Securities and Futures Commission has several pending consultations and research papers aimed at improving consumer protections and promoting competition.

Cybersecurity and privacy presents another compliance challenge. In May 2016, the Hong Kong Monetary Authority introduced the Cybersecurity Fortification Initiative, aimed at reducing the risk of cybersecurity attacks in Hong Kong’s banking sector, which includes a Cyber Resilience Assessment Framework, a professional development program and a cyber intelligence-sharing platform4. In the same month, the Monetary Authority of Singapore launched the Singapore Cyber Risk Management Project at the Asia Cyber Risk Summit.5 Although these initial efforts are mostly aimed at banks, we foresee others in the near future aimed at the broader financial sector, including asset and wealth managers, investment banks, corporate treasury operations and large asset owners. In addition to regulations aimed at protecting cyber space, we expect additional scrutiny aimed at protecting customer data.

Technology and cloud computing allow wealth managers to adopt new technologies and providers to remain competitive, improve processes, enhance service offerings or improve distribution. Because cyber risks are introduced through such arrangements, regulators will want to ensure that appropriate measures are taken to vet suppliers and monitor their privacy and security standards. It is not a matter of if cyber breaches occur, but when. Consequently, clients will want assurances that wealth managers have robust processes to identify risks, protect their assets, detect problems, respond to breaches and recover any losses.

Multijurisdictional residence/assets and tax reporting are becoming the norm. The “Panama Papers” revealed only the tip of the iceberg of offshore arrangements used to mitigate tax reporting. Countries such as Germany, the UK, China and the US have recently stepped up efforts to repatriate taxes owed from offshore citizens and corporate entities. Tax transparency and compliance with domestic and international tax laws are requisite for most Asian wealth managers; however, meeting these obligations is becoming increasingly expensive and complex.

Managing conflicts of interest is increasingly important. The financial services industry is prone to conflicts of interest, especially at large universal banks that raise and invest capital, as well as trade on the information. A PwC report found that the following types of conflicts are rife in financial services: nepotism, gifts, outside employment, self-dealing, insider trading, bribery/kickbacks, current or prior relationships with issuers and unjust enrichment6. Some Asian regulations regarding these conflict areas are weak, or regulations are not yet actively enforced7,8. To attract new capital and remain competitive internationally, the Asian markets and regulations will need to change.

Regulators are becoming more involved. Wealth managers have important roles in advising clients and investing assets. Wealth managers and their clients regularly face risks9. Consequently, regulators are concerned with wealth managers’ abilities to work in their clients’ best interests, as well as ensuring the integrity of the capital markets. Again, we can look to global markets to see a regulatory pattern emerging, which is likely to have some impact and influence on Asian regulations.

The US Securities and Exchange Commission (SEC) and US Financial Industry Regulatory Authority are training their analysts to use big data on a real-time basis to look for patterns across the industry and time periods to form the basis of investigations and insights into system abuses against which they can regulate. The SEC has also modernized private fund registration and reporting post global financial crisis. More recently, the SEC finalized reforms for money market funds. In March 2016, the SEC released four proposed rules and one request for comment related to revising existing regulations and incorporating several new pieces of regulation. These cover data reporting for investment advisors and mutual funds, exchange-traded products, liquidity risk management and derivatives. Proposals for stress testing and industry transition-planning regulations were also issued last year10. The asset management industry in Asia is deemed to be behind in regulating this behavior. It seems likely that more regulations similar to those in the US and/or the EU are in the future for many Asian countries.

Industry experts estimate the additional costs of regulation over the next few years for the wealth management industry may add 50 to 100 bps to fees11, which the firms would like to pass on to their clients. However, new regulations promoting competition and fee transparency may make passing through 100% of cost increases very difficult, resulting in squeezed profit margins. Examination of the wealth management markets in the US, UK and Switzerland show that wealth managers bear significant portions of these incremental costs and need to consider their operating models and strategies for handling them12. For smaller managers, outsourcing compliance and reporting to third parties may be the solution, assuming they have done their due diligence on the suppliers and are committed to monitoring them. Larger industry players have already been growing their internal compliance functions. Their size positions them to set standards around cybersecurity and privacy protection, while their market clout affords them influence on regulators that leads to fairer, simpler rules. Whichever strategy firms choose, doing nothing is not an option: regulation and enforcement are only expected to increase, and with those, the consequences for falling out of step with compliance.

 

EYGM Limited. Could your clients’ needs be your competitive advantage? The experience factor: the new growth engine in wealth management, 2016, available at www.ey.com/ Publication/vwLUAssets/EY-could-your-client-needs-be-your-competitive-advantage/$FILE/EY-could-your-client-needs-be-your-competitive-advantage.pdf.

CFA Institute. From Trust to Loyalty: What Investors Want, 2015.

Sutherland Asbill & Brennan LLP. “DOL Fiduciary Rule,” 2016, available at www.dolfiduciaryrule.com.

Hong Kong Monetary Authority. “Launch of the Cybersecurity Fortification Initiative by the HKMA at Cyber Security Summit 2016,” available at www.hkma.gov.hk/eng/key-information/press-releases/2016/20160518-5.shtml.

Monetary Authority of Singapore. “‘A Bold Approach to Cyber Risk Management’: Opening Address by Mr Bernard Wee, Executive Director, Monetary Authority of Singapore, at the Asia Cyber Risk Summit on 16 May 2016,” available at www.mas.gov.sg/News-and-Publications/Speeches-and-Monetary-Policy-Statements/Speeches/2016/A-Bold-Approach-to- Cyber-Risk-Management.aspx.

PricewaterhouseCoopers. “FS viewpoint: A matter of trust: Managing individual conflicts of interest for financial institutions,” 2012, available at www.pwc.com/us/en/financial-services/publications/viewpoints/assets/pwc-financial-institution-conflicts-of-interest.pdf.

Macrothink Institute. “A Global Comparison of Insider Trading Regulations,” International Journal of Accounting and Financial Reporting, Volume 3, Issue 1 (2013), available at www.macrothink.org/journal/index.php/ijafr/article/viewFile/3269/2976.

Conventus Law. “Anti-Corruption in Asia Pacific,” 2015, available at www.conventuslaw.com/report/anti-corruption-in-asia-pacific.

Deloitte. “Investment Management Outlook 2017,” 2016, available at www2.deloitte.com/us/en/pages/financial-services/articles/investment-management-industry-outlook. html#.

10 U.S. Securities and Exchange Commission. “SEC Accomplishments: April 2013–October 2016,” 2016, available at www.sec.gov/about/sec-accomplishments.htm.

11 Robeco. The future of asset management, 2016, available at www.robeco.com/images/201604-the-future-of-asset-management.pdf.

12 McKinsey and Company. McKinsey Global Wealth Management Survey 2014.

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Juliane Gruethner | 31 Oct 2019

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Alice Harkness | 31 Oct 2019

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Wejdan Alosaimi | 17 Oct 2019

For many decades, Saudi Arabia — as a nation, culture and economic force — has been inextricably tied to oil exports and the energy industry. However, a bold new vision, named Saudi Vision 2030, aims to wean the country off its dependencies on fossil fuels through the creation of sweeping new reforms and policies. This vision looks to modernize Saudi Arabia, both as a domestic society and a global financial powerhouse. The Power of Embracing Change   In 2016, Crown Prince Mohammad bin Salman bin Abdulaziz Al-Saud led the unveiling of the Saudi Vision 2030 initiative, which detailed the nation's unprecedented and extraordinary commitment to emerge as a leader in a rapidly evolving world. As oil prices continue to react to new economic realities and regional political forces shape the roles and objectives of nations throughout the Middle East, Saudi Arabia's decision to proactively embrace change could have extraordinary foreign and domestic ramifications. 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As other nations are slow to adjust to climate change and other geo-economic shifts, Saudi Arabia is poised to exemplify to the rest of the world how governments can leverage policy reform to enhance the lives of people both inside and outside the country's borders.2 Accommodating a Complex Global Economy   Saudi Vision 2030 will have a profound impact on rapidly growing economies, such as India, that seek to leverage digital transformation while implementing innovative domestic and workforce policies. In fact, the fate of Saudi Arabia and India are becoming increasingly intertwined, as India — unlike many western economies — requires more oil to empower its robust economic rise. Industrialized markets, in areas such as Europe and the United States, are seeking greener alternatives and more electric vehicles for transportation demands, but India remains heavily dependent on fossil fuels. By 2040, India will need to process up to 10 million barrels of crude oil every day to support its expanding economy and progressively urbanized populations.3 Saudi Arabia, a nation that already has a few notable government policies elevating the standard of living for its citizens (such as offering free college education to all citizens), is further internationalizing its economy by prioritizing privatization. The 2030 plan encourages financial institutions to promote private sector growth, marking a significant development in how the country is aligning its domestic workforces to compete in a globalized economy. The focus on increasing privatization and other non-oil industries — such as construction, finance, healthcare, retail and religious tourism — will create new opportunities for Saudi businesses and entrepreneurs.4 Creating a Future Through Indigenous Resources   Saudi Vision 2030 addresses many of the local, cultural challenges facing the nation, such as the role of women in the workforce and society, the impact of digital transformation and automation, and the need to modernize the sensibilities of Saudi businesses. Allowing women to drive and granting them greater access to economic prosperity — with the goal of increasing women's participation in the workforce from 22% to 30% — has generated positive responses with global investors. The 2030 plan also prioritizes domestic issues and the overall health of its citizens, with the stated objective of raising the average life expectancy from 74 to 80 years and aggressively promoting daily exercise and healthier lifestyles for all Saudi citizens.5 The Saudi government also seeks to bring its society into the digital age by implementing more e-government services that will connect citizens to resources through smartphones, data-centric operations and other technologies. This push will also drive human capital out of government jobs and into the private sector. According to the Mercer Global Talent Trends 2019 report, companies in countries such as India, Brazil, and Japan will experience a 70% increase in automation, boosting their need — like Saudi Arabia — to find new roles and professional development opportunities for workers. The 2030 plan offers an ambitious vision for the nation's indigenous resources. Empowering women and integrating modern technologies throughout its economy and government are just part of this comprehensive strategy. By inviting the global economy to invest in its progressive financial mechanisms and bolster tourism through campaigns highlighting the nation's history, Saudi Arabia is poised to lead its people, and the world, into a future forever defined by a new, modern view of the future. Will it work? The world will know in 2030. Sources: 1. Kingdom of Saudi Arabia. "Saudi Census: The Total Population." General Authority for Statistics, Accessed 11 July 2019,https://www.stats.gov.sa/en/node. 2. Mohammed bin Salman bin Abdulaziz Al-Saud. "Vision 2030." Vision 2030, 9 May. 2019, https://vision2030.gov.sa/en. 3. Critchlow, Andrew. "India is too important for oil titan Saudi to ignore." S&P Global Platts, 6 Mar. 2019, https://blogs.platts.com/2019/03/06/india-important-oil-saudi/. 4. Nuruzzaman, Mohammed. "Saudi Arabia's 'Vision 2030': Will It Save Or Sink the Middle East?" E-International Relations, 10 Jul. 2018, https://www.e-ir.info/2018/07/10/saudi-arabias-vision-2030-will-it-save-or-sink-the-middle-east/. 5. "Saudi Arabia Vision — Goals and Objectives." GO-Gulf, 14 Jul. 2016,https://www.go-gulf.com/blog/saudi-arabia-vision-2030/.

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