Expert: Jessica Reed, Farrer & Co Facilitator: Mark Spiers, Bovill
Headlines:
- The first TCFD-aligned disclosures need to be made by firms above the £5bn exemption by 30 June 2024 and the labelling, naming and marketing rules will enter UK law in October 2024
- In the medium term, a considerable amount of time will be required to decipher and prepare for the UK/EU ESG disclosure regimes
Context:
A winning mindset:
Due to an increased regulatory activity over the past two years, wealth managers and private banks find themselves in a reactive mode, rather than strategically assessing the forthcoming regulatory changes.
With the July Consumer Duty implementation deadline fast approaching, most agendas are currently dominated by the Duty implementation plans.
Wealth managers are grappling with the potentially unintended consequences of the initiative, such as the need to ring-fence or even off-board (U)HNW retail clients, the pressure of justifying the price of their services which are bespoke in nature, as well as a lack of specifics within the rules leaving most provisions subject to interpretation.
The latter comes less as less of a surprise, as it is a consequence of the outcomes-oriented and principle-based nature of the FCA regulation.
By now, wealth managers and private banks will be well familiar (albeit uncomfortable) with the idea that no generic “checklist” is a sufficient measure to ensure they are acting to deliver good outcomes to customers and fulfilling their regulatory obligations towards retail clients.
It is worth remembering that, in this sense, previous implementation of the initiatives such as TCF and RDR, has been good preparation for many firms.
Wealth managers should also be encouraged by the recent speeches coming out of the FCA, where the regulator has noted that firms are largely on course to comply with the Consumer Duty.
As a preparatory measure, firms will need to look into technology-driven solutions to gather and analyse relevant data and produce meaningful MI once the Duty has been implemented, because ongoing compliance monitoring will be crucial.
In other words, firms should now get into a winning mindset to be able to “just eat the frog”, as was suggested by the FCA’s Sheldon Mills back in February.
Fair Value and Price: Do FVAs produce Good Customer Outcomes?
Out of the four Consumer Duty outcomes (products and services, price and value, consumer understanding and consumer support) wealth management and private banking firms find the “fair value” aspect of the price and value outcome the most challenging to implement.
This is because it is difficult to address something which is not fully understood and is hard to measure.
For instance, wealth managers are sceptical about the “value” component of the Fair Value Assessment and believe that the regulatory focus will ultimately shift to price. As such, it is unclear whether high profit margins would be equated to poor customer value.
In the past, this approach to value was already evidenced in the Authorised Fund Manager Value Assessments.
Some firms are wondering how they will be able to provide better products, which inevitably means better governed products, and avoid passing the cost onto their clients?
Better governance also translates into competitive remuneration packages for the senior firm employees- and these will become more difficult to secure with the downward price pressure.
This pressure may also require firms to cut out the advice process out of their offering altogether, which will only widen the “advice gap”.
Finally, some firms believe that the rules around fair value represent a tacit attempt by the regulator to meddle in the normal practice of consumers shopping around, which is a natural driver of competition.
It therefore remains to be seen whether FVAs will, indeed, lead to better consumer outcomes in the wealth management sector.
ESG: Is It All It’s Made Out to Be?
The amount of regulatory chatter and rules pertaining to ESG can only be compared with the similarly hot topic of AI.
The ESG theme in regulation is likely going to continue and so ESG teams will keep growing at wealth management firms.
With this much regulatory effort dedicated to ESG, however, it is uncertain whether there is an increased customer appetite for ESG investing to match.
If proactively asked: “Would you prefer to invest in a sustainable manner?”, most clients would respond affirmatively. However, wealth managers and private bankers report performance, not ESG, continues to be the main driver of investment decision for their clients.
For this reason, and because firms do not want to appear to be “leading” a client to an ESG solution, firms refrain from including ESG as part of client suitability assessments.
In addition, most clients’ understanding of ESG centres around “divestment” as the go-to approach.
This is why in absence of a meaningful ESG benchmarking framework, it is difficult sell an ESG strategy without educating a client on other ESG investing approaches, such as stewardship, first.
At the moment it appears that regulation does not help to provide the much-needed clarity. For instance, SDR may boost the competitive advantage of a certain segment of wealth managers at the expense of others.
Under SDR as it currently stands, managed portfolio service providers can only use a label if 90% or more of the value of all constituent products in which they invest qualify for the same label. On the one hand it means the same label may be applied to MPS providers, on the other hand it is a high threshold, as any portfolio that holds funds with a mix of the SDR labels would not itself meet the requirements for a label.
With the above issues in mind, wealth management and private banking firms would like to see appropriate regulation of ESG rating agencies come into force in the near future.
Key takeaways:
- Wealth managers and private banks can put themselves into a “winning mindset” when tackling regulatory change, such as ESG and Consumer Duty by:
- Using the “lessons learnt” from their implementation of former FCA regulation and invest in technology for gathering, analysing and tracking consumer outcomes
- Broadening their regulatory scanning and impact assessment capabilities will also enable them to think strategically and ensure they are positioned for success
- A call on industry bodies to develop a framework for Fair Value Assessment under the Consumer Duty is needed
- The UK government should look for further ways of alignment/regulatory convergence with the EU ESG disclosures in the wealth and investment management space
- The UK Government should regulate rating agencies that rank ESG strategies
- These actions will allow the disclosure regime to become workable, and will, in turn, allow the wealth managers to begin to compete and provide more interesting solutions to clients in the sustainable investment space
- However, even with clear rules in place, the government and the industry need to think of ways to ensure ESG strategies are at least as lucrative as their non-ESG y takeaways
