The wealth management industry: changes and opportunities

The period following the financial crisis of 2008 heralded a time of huge change, challenge and opportunity across the financial industry

Skyscrapers in Canary Wharf, London. Legislation from Europe is likely to have significant implications for the UK wealth management industry Skyscrapers in Canary Wharf, London. Legislation from Europe is likely to have significant implications for the UK wealth management industry
Skyscrapers in Canary Wharf, London. Legislation from Europe is likely to have significant implications for the UK wealth management industry  

Although not directly part of the crisis, the wealth management industry was still impacted with the tarnish that came to the financial sector. It faced the same challenges around client trust and the need to adapt in a new world.

As the financial markets worldwide bounced back, growth was linked to firms reviewing their operational strategies and priorities. Many altered their business models or merged with or acquired other businesses. While there may be further consolidation, wealth management firms also find themselves in a highly challenging environment with rapid technological advancement, political uncertainty and excessive regulation.

One particular change has been adapting to the increased influence of the European regulatory system. Following the Lisbon treaty, the UK ceded a great deal of power to the EU and is now in a position where regulations agreed in Brussels can come into direct force in the state without any input or influence at a national regulator level. Directives still allow national discretion by the UK’s FCA but – at least in the immediate period after crisis – a huge raft of regulation was passed to send a strong message globally that the situation was being taken in hand.

There are many ways the Government could help to further encourage retail investment in shares

One example of legislation coming from Europe, that will have significant implications for the sector, is the second version of the Markets in Financial Instruments Directive/Regulation – MiFID II/MiFIR. The WMA has been in continuous engagement with key influencers in Europe, as well as the FCA, to ensure the legislation is as appropriate as possible to the UK wealth management industry. The organisation is still campaigning for a number of changes to the rules, including that investment trusts should not be defined as “complex”, as this may deter retail investors from purchasing shares in the asset and will mean that firms have to complete an appropriateness test every time a client wishes to purchase an investment trust on a non-advised basis. Their major concern now is the timescale to implement MiFID II – firms will have to implement a number of system changes to meet the requirements and many details of the legislation have not yet been confirmed. This means that the deadline for implementation of January 3 2017 will be extremely difficult to meet.

Despite the fact that a lot of financial services regulation in the UK comes from Europe, there has also been recent legislation originating further afield, namely in the US. The Foreign Account Tax Compliance Act (FATCA), which requires foreign financial institutions (FFIs) to report information about financial accounts held by US. taxpayers, is now in operation. Following in the US’s footsteps, the OECD created the Common Reporting Standard (CRS), which will be implemented from January 1 2016 and will require firms to identify and report the tax residency and related information of individuals and entities in over 100 jurisdictions.

Although the amount of legislation coming from Europe and the rest of the world can be daunting for the wealth management sector, it can also create excellent opportunities for the industry and its clients. The European Commission’s recent proposals for a Capital Markets Union (CMU) is an opportunity to boost economic growth and employment in the EU by helping businesses to “tap into diverse sources of capital from anywhere within the EU and offer investors and savers additional opportunities to put their money to work”. The WMA continues to feed into discussions around the building of a CMU, with the aim of ensuring that individuals and their families are at the core objective of the CMU, and that concern for the retail investor is therefore its central focus.

So regulation is undeniably a key factor in the wealth management industry, but there are other changes and challenges as well. For example, firms have to ensure they keep up-to-date with technological change and systems upgrades, continue to recruit talented staff and obtain new clients, and protect their business against the ever-present threat of financial crime and cybercrime. WMA member firms are increasingly citing financial crime, especially the threat of cyber attacks, as one of their key concerns. The organisation holds an annual financial crime conference to inform member firms of the latest financial crime legislation and recent advancements in cybercrime and cyber security.

The wealth management industry is extremely important to the UK, growing the wealth of individuals and families, which should in turn boost economic growth and living standards for all. The WMA strongly believes that retail investment should be encouraged for all UK citizens and that the government should help to promote a cultural shift towards long-term investment in any way it can.

There are many ways the Government could help to further encourage retail investment in shares, for example by ensuring that individual investors are allowed to participate in Initial Public Offerings (IPOs) whenever it is appropriate. The best way of achieving stronger and more accountable organisations is to ensure the widest possible range of shareholders. Giving priority to institutions or sovereign wealth funds ignores those who have a vital stake in these companies in the first place and the Government has a duty to ensure ordinary retail investors have an opportunity to own shares in such companies. Individual shareholders are typically investors, not speculators – they look to the long term and many take an active interest in the performance of the companies they own. What’s more, investors do not pay stamp duty on IPOs but will in the secondary market. The Government could definitely do more to promote retail involvement in IPOs – not only should they encourage private companies to include a retail tranche when listing but ensure that sales of government-owned companies are open to individuals. The WMA was disappointed that retail investors were not given the opportunity to participate at all in the second part of the Royal Mail share sale recently.

The Government has taken steps recently to promote investment by individuals, for example by abolishing stamp duty on exchange traded funds (ETFs) from April 2014, which is a strong incentive for investment into the UK, and also benefits retail investors. However, the Government could and should go further, for example by also abolishing stamp duty on stocks in ISAs and SIPPs, in order to further encourage investment that could not only give new opportunities to ordinary investors, but contribute to wider economic growth.

Individual Savings Accounts (ISAs), and multiple modifications to them in recent years, have helped to promote long term saving and investment by individuals in the UK. Recent important developments from the Government have included the creation of increased flexibility between Cash ISAs and Stocks and Shares ISAs; the introduction of Junior ISAs to encourage saving from an early age and help teach children about financial planning; the allowance of investment in AIM-listed shares within Stocks and Shares ISAs; and the creation of the Help-to-Buy ISA.

George Osborne announced in his pre-election Budget that the Government was committed to a “savings revolution” – with many looking forward to seeing further policies announced that will truly contribute to a culture of long term savings and investment in the UK.

The wealth management industry and the prospects for retail investors have seen some significant changes in recent years, creating both challenges and opportunities. Lord Hill, the British European Commissioner for Financial Services, is committed to reducing the amount of regulation coming from Europe so there are potentially blue skies ahead in this area. The current UK Government seem to be dedicated to encouraging retail saving and investment, which should also create opportunities for the sector. However, the threat of cybercrime is not diminishing and the pace of technological change does not appear to be slowing. Nobody can be sure of what the future of the wealth management industry will hold– but it will no doubt evolve and grow through the continuous pace of change that characterises today’s financial landscape.