PIMFA Autumn Journal 2020

The Personal Investment Management & Financial Advice Association

JOURNAL AUTUMN 2020 INVESTING IN TIMES OF CLIMATE CHANGE Climate change has become one of the biggest sustainability issues...

FINANCIAL SERVICES FIRMS ARE BEING ATTACKED ON ALL FRONTS It’s not just cyber technologies or digital currencies that are worrying financial crime teams...

FILL THE DIGITAL GAP TO THRIVE IN THE "NEW NORMAL”

The Covid-19 pandemic has put the financial

sector’s resilience to the test...

PRE-EMPTING THE NEW NORMAL: 2021 PLANNING In the wake of the shock of the global pandemic, and despite significant market volatility, it seems that...

BUILDING PERSONAL FINANICAL FUTURES

CONTENT PAGE 12

Meeting Investor needs: a case study on International Securities

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Investing in times of climate change

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Fill the digital gap to thrive in the "new normal"

Investing in times of climate change

Pre-empting the new normal: 2021 planning

Firms must adapt to the post-pandemic world now to avoid regulatory repercussions

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Meeting Investor needs: a case study on International Securities

SM&CR - A welcome delay to final implementation for many

Financial Services firms are being attacked on all fronts as criminals

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Shine a light on your business

Cyber doctor

The Insurance market look out

PIMFA compare my allocations report

Next-gen model c-suite view

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AUTUMN 2020

FILL THE DIGITAL GAP TO THRIVE IN THE “NEW NORMAL”

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he Covid-19 pandemic has put the financial sector’s resilience to the test, throwing firms and their clients into a complex scenario ruled by uncertainty.

In particular, the impact generated by Covid-19 social distancing measures has shown and further accentuated the delay in digital transformation accumulated in the Wealth Management sector.

Wealth Managers have so far benefited from the growth in wealth of HNW and UHNW clients, which offset the decline in margins and compensated some inefficiencies in the operating models. Now, financial institutions must take action to prepare their business for growth in the "new normal" post-Covid environment.

According to the recent report "After the storm", by Oliver Wyman and Morgan Stanley, digital engagement of customers among the main operators in the sector has increased by 7-10 times following the onset of the pandemic. As a result, the report emphasises that the implementation of new advisory models is essential, accelerating the use of digital to promote growth over the next 5 years.

We are entering a future where the pace of change is increasing and the need for innovation is amplifying and these trends are rapidly converging, becoming more vital than ever.

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OBJECTWAY SEES THE FOLLOWING PILLARS AS PIVOTAL IN ADAPTING TO THE PRESENT AND PREPARING FOR THE FUTURE:

SEAMLESS NETWORKING: client portals,

digital tools and a virtual environment meet the clients’ increased needs to work without barriers, staying in touch online in a secure, efficient and costeffective way.

A digitally enabled Client Lifecycle Management is not an option anymore, but needs to be considered as a mandatory capability and the new regular practice.

There is a clear call for a redefinition and re-shaping of current practices introducing new onboarding and engagement approaches, to have customers more loyal and more open to new opportunities and business propositions.

Delivering wealth and asset management technology and services to more than 200 leading market players in four continents, we observed that the most frequent practices in Client Lifecycle Management show some gaps, such as insufficient adherence to structured planning and documentation of all interactions for analysis and next actions.

Other gaps are the lack of capabilities for optichannel communications; shortcomings in the design of an engaging customer experience, and an incomplete single view of all this.

Many firms struggle to structure improvements into an action plan, or to prioritise. For this reason, we have identified an integrated approach to this purpose.

“DIGITAL PLUS” ADVISORY: relationship

managers should communicate with clients in an authentically caring and confident way, feeling more connected with them and contextually improving their productivity thanks to digital collaboration tools.

Firstly, wealth managers have to commit to a strategy of digital client engagement, document it and embed it into all plans and initiatives.

To support a full client lifecycle management, they need to adopt a unified digital platform and a unique information architecture, with a common unified

business data model. This implementation would allow them to provide their relationship managers with an integrated platform consisting of dashboards and a 360° client view that automates information delivery and provides actionable insights, while designing a superior customer experience at each touchpoint and enabling realtime remote collaboration across all channels and devices. Lastly, this results in a fully paperless investment service for both prospect onboarding and customer servicing.

Customers who have already adopted this strategy have been able to leverage digital capabilities to provide a timely and highly personalised service, even in such a difficult time, dealing with today and preparing for tomorrow's challenges.

Firms that are not preparing now will fail to meet the strong demand of change originated by the generational, behavioral and attitude shift among clients - and accelerated by the pandemic - and will lose market share.

Our recently released report “Are you really engaging with your clients?” gives a deep view on how to fill digital gaps in client engagement and lifecycle management.

Download it HERE. Alberto Cuccu CEO, Objectway Ltd www.objectway.com

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AUTUMN 2020

INVESTING IN TIMES OF CLIMATE CHANGE AN EXPANDING ARRAY OF CHOICE FOR CLIMATE-AWARE INVESTORS

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limate change has become one of the biggest sustainability issues for investment portfolios.

Investors have become increasingly aware that greater climate variability and more frequent extreme weather events could have considerable effects on businesses. Asset managers in Europe have responded to this new dynamic by launching a flurry of climate-aware funds and tweaking existing strategies to incorporate climate change objectives such as lower-carbon footprint, reduced exposure to fossil fuels, and greater exposure to renewable energy opportunities.

In Europe, Morningstar identified 405 open-end funds and ETFs with a climaterelated investment objective, representing close to EUR 60 billion of assets as of 31 March 2020.

CLIMATE-AWARE FUNDS CAN BE SUBGROUPED INTO SIX TYPES BELOW: x Low Carbon

funds seek to invest in companies with reduced carbon intensity and/or carbon footprint relative to a benchmark index.

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The six climate-aware fund groupings we have identified represent a broad range of approaches that aim to meet different investor needs and preferences. The choice of one type over another largely depends on an investor's investment goals, risk appetite, and preferences.

funds to de-carbonise their portfolios. These approaches provide broad and diversified exposure to the market. They are therefore suitable as part of a portfolio core allocation.

Investors looking to take advantage of this transition can turn towards Climate Conscious funds. These typically exhibit low carbon risk and fossil-fuel exposure−like Low Carbon and Ex-Fossil Fuel funds−with the added benefit of higher Carbon Solutions Involvement.

Investors concerned about climate-related risks can use Low Carbon or Ex-Fossil Fuel

CLIMATE STRATEGIES AND THEIR ROLE IN PORTFOLIOS

x Ex-Fossil Fuel

funds have incorporated a fossil-fuel exclusion into their mandate. The exclusion can be flagged in the name of the fund.

x Climate Conscious

funds represent somewhat of a hybrid group that invest in a mix of companies: those that positively align with the transition and those that provide solutions to climate change.

x Climate Solutions

funds exclusively target companies that contribute to the transition to a lowcarbon economy through their products and services and that will benefit from this transition.

x Clean Energy/ Tech

funds invest in companies that contribute to or facilitate the clean energy transition. These are typically more concentrated than any of the above fund groupings with also a bias towards mid- and small caps.

x Green Bond

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HOW CLIMATE-AWARE FUNDS FIT INTO AN INVESTOR'S PORTFOLIO

funds invest in debt instruments that finance projects facilitating the transition to a green economy.

Further along the risk-opportunity spectrum, Climate Solutions and Clean Energy/Tech strategies can appeal to investors with a greater risk appetite and who consider climate change as an alpha-generating opportunity. Because of their narrower market exposure and bias towards mid- and small caps, Climate Solutions and Clean Energy/Tech funds represent more-volatile investments.

They also currently often come with higher carbon risk, which means that their holdings are more vulnerable to the lowcarbon transition. This is because they hold companies that are at different stages of their transition journey.

Given their less diversified and higher risk profile, Climate Solutions and Clean Energy/ Tech funds are more suitable as part of a satellite allocation to complement rather than replace existing core holdings. Clean Energy/Tech funds can fit particularly well with Ex-Fossil Fuel core exposures.

Similarly, Green Bonds funds can complement core bond holdings rather than substitute core bond funds. Despite many having similar duration and credit quality profiles, the underlying bonds are issued to finance specific projects in a limited number of sectors. This, however, will evolve, as the market continues to grow.

At first glance, the universe of climateaware funds may appear complex and, in some cases, counterintuitive. It is therefore important that investors do their homework.

When selecting a climate fund, investors should understand its investment objective and how its portfolio is constructed, ensure they are comfortable with the level of carbon exposure, and crucially, look at the fund holdings to avoid any bad surprises.

Despite their similar names, climate-aware funds offer a variety of climate strategies and invest in different types of companies, which result in different outcomes. Climateaware funds also have a relatively short history, with most launched in the past two to three years, making their performance hard to assess.

To conclude, the menu of options for climate-conscious investors in Europe has expanded considerably in recent years and will continue to grow as asset managers strive to help reorientate capital towards more climate-friendly investments, in line with the ambition of the EU Action Plan on Sustainable Finance.

By Hortense Bioy Director, Sustainability Research EMEA and APAC, Morningstar www.morningstar.co.uk

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AUTUMN 2020

PRE-EMPTING THE NEW NORMAL: 2021 PLANNING

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n the wake of the shock of the global pandemic, and despite significant market volatility, it seems that, on the whole, Wealth Managers (WMs) have weathered the storm reasonably well so far. Most have reported very low outflows, with clients preferring to move positions to cash or hold in the hope of future growth. As WMs turn their attention to next year and start to set their internal investment budgets, they find themselves asking – in a postCovid world which has transformed business models, client expectations and regulatory challenges - what should WMs be prioritising?

A DIGITAL CLIENT EXPERIENCE Despite heavy investment into client management technologies, 80% of WMs still do not feel they have a strategic solution capable of meeting client expectations (Alpha FMCs Digital Survey). The forced switch to primarily digital engagement has removed any previous scepticism of client adoption, and what was a priority pre-Covid like digital document vaults and e-signatures, is now a necessity. With a trend toward client-driven engagement, and demand for more involved and informed investments, WMs with

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limited digital capabilities risk being left behind – and quickly.

themselves to become the adaptable, scalable Wealth Manager of the future.

Digital as the norm increases the disruptive potential of challengers and new entrants. FinTechs offering Wealth Management and Investment solutions are well placed to attract clients away from traditional providers. To remain relevant, WMs need to differentiate.

The way to do this may be very different from one client to another, and traditional client segmentation is being replaced by a truly personalised service. Digital allows WMs to leverage client data and intelligently inform a personalised client offering which is both tailored and relevant.

Digital isn’t just for client engagement; using digital to automate processes and improve operational efficiency has big benefits for both the top and bottom line. The ability to reduce operational costs and enhance sales performance makes the case for digital more compelling than ever. Supported by an agile approach to change, WMs will have a far more dynamic and nimble business model, capable of responding to changing demands and ready to capitalise on opportunities.

A DIGITAL BUSINESS MODEL Covid has changed the game. Firms across all industries are reviewing their operating models and determining how they can take advantage of the new environment to optimise operations, increase scalability and enhance productivity. Wealth Management will be no different. The client engagement model has been revolutionised and employee working patterns have arguably seen even greater change.

Whilst this has, and will, continue to present firms with challenges, they should embrace the new and equip

COMPREHENSIVE INVESTMENT CAPABILITIES Factors impacting investment decisions have changed drastically. A highly uncertain equities market and significant government debt means traditional investment portfolios, in the short to medium term, are unlikely to offer the reliable returns at reasonable risk levels to which investors are accustomed. Redistribution across a multi-faceted Investment proposition demands an advanced investment capability to avoid an ungainly and highly costly operation.

Gaps in the product shelf carry a higher risk and “nice to haves” quickly become “need to haves”. ESG has been further propelled into the spotlight and lacking a meaningful, robust ESG investment offering could say more about the firm than a product gap alone. WMs will also need to look for ways of unlocking alternative investment options, finally opening the higher-risk-yet-higherreward Private Markets to the regular investor, previously kept only for the super-rich and super-sophisticated.

GROWTH MARKETS Speaking of super-rich and supersophisticated, in recent years firms have been competing to broaden their offerings to the mass affluent market and will continue to do so: but are there new markets offering alternative growth areas? The UHNW and Family Office market is evolving, generational wealth transfer is happening, and they are an increasingly active and dynamic investor base. But in a post-Covid

world where margins are squeezed and digitisation is the norm, there is room for WMs to expand offerings to rival independent multi-family offices - many of which don’t have the operational abilities or broad market access WMs can offer.

REGULATION Operational Resilience has been climbing the regulatory agenda for a while and operating in a remote, digital environment is only going to accelerate this. Protecting client information, ensuring the security of transactions, and counteracting cyber-crime must become a priority.

monitoring capabilities can sufficiently demonstrate that standards of control are equally high in the remote environment.

WMs should also not forget pre-Covid problems. Brexit has not gone away, and the inevitable shifting sands of the final details mean firms will need to revisit Brexit plans.

For Wealth Managers looking to build out their 2021 budgets, this list goes some way to informing the first steps and key priorities to consider.

By Kenn Taylor Director, Head of Wealth Alpha FMC www.alphafmc.com

Equally robust oversight and control has long been a requirement of the regulator and whilst a shift to remote working will undoubtedly create challenges, the standards and expectations within SM&CR will not change. WMs will need to ensure

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PIMFA JOURNAL

AUTUMN 2020

FIRMS MUST ADAPT TO THE POST-PANDEMIC WORLD NOW TO AVOID REGULATORY REPERCUSSIONS

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n 24 November 1918, two weeks after Armistice, Prime Minister David Lloyd George gave a speech urging the nation to look forward, capture the spirit of optimism, and not to “waste this victory merely in ringing joybells”. A victory over Covid-19 may be more of a gradual process with fewer joybells, but the sentiment still stands. Bovill believe now is the time for financial firms to look to the future.

Before, during, and after the crisis, governance remains key. For firms operating under the Senior Managers and Certification Regime, those holding a Senior Management Function (SMF) and Certified functions should satisfy themselves that their actions and behaviours were in line with regulations. SMFs in particular should ensure they can evidence and justify the ‘reasonable steps’ they have taken during the coronavirus crisis.

For some firms, Covid-19 has proven to be an existential threat, and decisions made in crisis (and in haste) inevitably err towards the sub-optimal. Senior Management should review the choices they have made through the lens of customer outcomes, not just the focus on immediate commercial and cash-flow imperatives.

An effective past business review (and an effective defence against a claims management company), is predicated on the quality of data available. For many firms, maintaining effective record keeping during the crisis has been a significant challenge. The European Securities and Markets Authority (ESMA, echoed by the FCA) has said it recognises that MiFID II requirements on the recording of telephone conversations can be relaxed during these exceptional circumstances. But there is nevertheless an expectation that firms will inform clients of the change and maintain written minutes of telephone conversations, as well as keeping broader business records accurate and up to date.

Data security and cyber-crime prevention should be joining ‘pandemic’ as key topics to focus on when Business Continuity Management (BCM) and resilience plans are reviewed in the future. It has been impressive to see how BCM has morphed into BAU within many firms, but this has not been without considerable effort from operations and IT teams. Clearly, BCM plans require revision once this is over, as many of the assumptions and aspirations within them will need right-sizing against reality.

Resilience is also critical. Rather presciently, the PRA and FCA had already started a conversation on the subject before the Covid-19 crisis hit, and it is expected that they will return to the subject, with vigour, in light of the last six months. In advance of regulator action, firms should capture the learning from the current situation and

consider how they can use it to better serve customers in the future.

What the post-Covid-19 world will look like remains uncertain. But it is inevitable that customers’ financial plans and needs will change. Businesses will need to respond to this. As Britain (and the rest of the world) yearns to get ‘back to normal’, forward looking firms are using this time to consider what the new normal might be.

Rather than merely fixing issues with existing processes, firms should take the opportunity to examine all the elements of the delivery chain and ask – does it add value, does it add risk? An honest appraisal of risk versus reward will help firms focus on what matters to them, and to their customers.

Of course, a big question on many of Bovill’s clients’ minds is - do we need to go into the office every day? Do we need call centres? As firms consider the potential cost-efficiencies of smaller office spaces and less infrastructure, they see significant benefits.

However, if firms are going down the road of more decentralised operations, then governance and oversight will be harder to manage, and could require costly and complicated overhauls.

All of these issues and unanswered questions serve to illustrate the point that, as we move slowly back to a form of normality in the wake of the coronavirus pandemic, financial services firms must already be planning for and responding to the future. If not, regulatory repercussions will prove costly.

By Frank Brown Managing Consultant Head of Risk and Transformation Bovill www.bovill.com

There will have been instances of poor advice, poor judgement, and poor outcomes. Prudent organisations will therefore be looking to undertake reviews of business written, and the customer interactions that occurred during the lockdown period. Firms should take a proactive approach, before the regulator comes knocking. For some sectors, claims management companies are already preparing their boilerplate letters.

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AUTUMN 2020

MEETING INVESTOR NEEDS: A CASE STUDY ON INTERNATIONAL SECURITIES

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he combined market cap of Alphabet, Amazon, Apple and Microsoft is over $6.5tr 1. To put that into perspective, it is comfortably higher than the combined Gross Domestic Product of France and the UK in 2019. Other consumer orientated stocks such as Facebook and Tesla have also seen significant interest in recent years as increased global consumerism is driving UK investment interest in global stocks, a trend which UK infrastructure must adapt to and look to facilitate in an optimal manner.

WHERE A COMPANY LISTS The majority of companies choose to list on the local exchange where they are based. Domestic investors are likely to have a greater awareness of the activities of the company and there are logistical benefits for the listing company too such as common language, time zone and legal framework. Several other factors mean at times a company will choose to list away from their home market.

These can include the size of the local capital market, regulatory landscape or a specialism of the listing venue.

In the UK we are fortunate that overseas companies often choose to list here to benefit from the scale of the capital market and the natural

pull of investors this size produces. In turn, this gives UK investors easy access via well-established infrastructure to a broad cross-section of global securities in a wide range of sectors.

MEETING INVESTOR APPETITE However, UK investor appetite for nonUK listed companies continues to grow in line with increased availability of information and greater brand visibility of a globalised world. It is therefore easy to understand why a UK investor could be drawn to invest in a large US tech stock as much as a traditional UK blue chip.

Demand for access to foreign listed securities has long been facilitated by UK brokers. The challenge for the broker is to have an underlying infrastructure that supports this trend in the most efficient way for themselves and their clients.

ACCESS VIA UK INFRASTRUCTURE There is continuous development in the financial market infrastructure product offering to meet the expanded appetite of UK investors. Interest in the largest global companies is so significant that new eco-systems of liquidity can function well away from their primary

markets and be effective for the end investor. Downstream from execution it is possible to hold and transfer international securities with the familiarity of domestic UK securities reusing the existing access, process and system of Euroclear UK & Ireland (“EUI”).

EUI is the only regulated Centralised Securities Depository (“CSD”) in the UK, whose primary role is to record ownership of over £5tr2 of UK equity and debt dematerialised assets. In addition, EUI offer a service for UK investors to hold and transfer non-UK securities.

UK Regulations do not currently provide for securities constituted under the laws of other countries to be held or transferred in the CREST system directly. The EUI International Service and CREST Depository Interests (“CDI”) were created to enable international securities to be settled in the same way as UK domestic securities in the CREST system. For this service, CREST act as a depository in respect of international securities so may issue CDIs representing international securities, as independent securities.

CDIs are issued to CREST members to represent an entitlement in relation to the underlying international securities.

CDIs are constituted under English law and are transferable by means of the CREST system to other CREST members in the same way as UK securities.

The EUI International Service has existed for many years and as a result of increased investor interest has expanded to cover more than 8,500 securities from 15 underlying issuer CSDs3. As well as international ETFs, the larger US, European and global securities are available in the CREST International Service. It also provides EUI members with access to issuers with a large UK presence. Many CDIs are tradable on UK trading venues, including the London Stock Exchange.

THE BIGGER PICTURE

UK infrastructure providers and their regulators must recognise the trends in investor appetite and work together as an industry to adapt the framework to ensure investors have access to such instruments within a secure, well regulated environment that has been refined over many years for traditional UK assets.

By Chris French Head of Business Development Euroclear UK & Ireland www.euroclear.com

Changes in technology and how companies raise capital will continue to drive the evolution of UK investor appetite, with the increase in interest in international securities being just one example.

1 https://www.tradingview.com/markets/stocks-usa/market-movers-large-cap/, 3rd September 2020

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2 As at 31st August 2020 3 As at 31st August 202 0

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AUTUMN 2020

SM&CR – A WELCOME DELAY TO FINAL IMPLEMENTATION FOR MANY

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sually the Financial Advice sector breathes a big sigh of relief as the schools break up in July as it usually means there is a let up in regulatory announcements and proposals for regulatory change.

However, 2020 has turned into a very different year.

For many schools, the year finished at the end of March when CV-19 was officially classified as a pandemic and life as we knew it changed into something very different.

So, for many, the annual juggling of working and school holidays was replaced by a five month balancing act between home working and home schooling followed by school holidays. Against this backcloth, I have no doubt that many firms and their HR & Compliance teams were mightily relieved to see an update from the FCA proposing delays to the remaining elements of SM&CR. On the 17th July, the FCA put out a news statement on their website that made a number of announcements in respect of delays to the final elements of implementation of the Senior Managers & Certification Regime (SM&CR).

This announcement confirmed what many in the industry had been hoping for, i.e. that there would be additional “breathing space” for firms around implementing the final elements of SM&CR. The proposed changes are:

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HM Treasury proposing a change in legislation to allow the deadline for the implementation of the Certification Regime to be delayed until 31st March 2021.

A consultation proposing to extend the deadline for training staff in the Conduct Rules.

A consultation proposing to extend the deadline for reporting Directory Persons data.

As an aside, it’s interesting to me that it appears to be a little known fact that the Certification Regime requirements of SM&CR are firstly a legislative requirement, hence the need for HM Treasury to propose amending the legislation which is then supported by guidance in the FCA Senior Management Arrangements, Systems and Controls sourcebook (SYSC).

This seems to be lost on many, but for industry observers this only underlines how critical the introduction of the Certification Regime as a concept is to the FCA in its on-going supervision of the markets and its desire to increase the competence and professionalism of those that operate within it. In my view, any firms that have not ring-fenced resource and finance to help implement the regime within their firm, does so at their peril! Remember, how you interpret and implement regulatory change is a clear signal to the regulator about the culture within your firm.

At a recent event I attended, Peter Ewing from the FCA was feeding back on the FCA’s Banking Stock Take report.

It was interesting to note how frank the discussion was around the findings. Peter said that if they were to traffic light the implementation of SM&CR within the banking arena, then the implementation of the Tier 1 & 2 Conduct Rules training programmes to those populations that required them would be classified as red. The reasons cited were as follows: ◊

Interviewees believed that staff generally understood the conduct rules. However, evidence suggests that firms have not always sufficiently tailored their conduct rules training to staff’s job roles.

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Firms are often using their own values to articulate how they bring the conduct rules to life. However, there was insufficient evidence to be confident that firms have clearly mapped the conduct rules to their values.

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Many firms were often unable to explain what a conduct breach looked like in the context of their business.

The full detail of the report itself can be found here Based on that alone, it is clear that if you overlay this with CV-19, home working, home schooling, and some staff within firms being furloughed, it really is the right thing to do to delay implementing conduct rules so firms can refine their content and delivery approaches and learn lessons from the banking sector. However, a few months delay does not mean firms can relax; far from it.

B Julie Pardy Director of Regulation & Market Engagement Worksmart Ltd www.worksmart.co.uk

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AUTUMN 2020

FINANCIAL SERVICES FIRMS ARE BEING ATTACKED ON ALL FRONTS AS CRIMINALS BECOME INCREASINGLY ADAPTIVE AND SOPHISTICATED IN THEIR APPROACH

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t’s not just cyber technologies or digital currencies that are worrying financial crime teams in financial institutions, including wealth and asset management firms, across the UK & Ireland. It’s also the increasing volume and variety of more established financial crimes that aren’t new, but are incredibly hard to detect, such as mule activity, the proceeds of trafficking, the abuse of corporate structure and the criminal use of third parties.

According to a new report, Future Financial Crime Risks, 2020 released in August by global data and analytics provider, LexisNexis® Risk Solutions, UK firms are spending the equivalent of 3% of their annual revenue on financial crime compliance, with the average annual compliance spend for a wealth management firm being £12 million, rising to almost £60 million for larger banks. Despite this massive spend, organisations still worry about their exposure to money laundering and the risk of inadvertently facilitating serious organised crime like trafficking, murder, kidnapping and terrorism.

The report captures the views and opinions of over 300 financial crime compliance professionals working in asset management and wealth

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management firms, as well as banks, challenger banks and fintechs in the UK and Ireland. Respondents gave their perceptions of the current financial crime landscape, identifying what the current risks are, and where they see risks emerging in future. In the past 12 months, Money Laundering Risk Officers (MLROs) in wealth management firms report being exposed to a wave of financial crime methodologies, the criminal use of third parties such as law firms, accountancy firms and estate agents (43%); money mules (30%); tradebased money laundering schemes (30%); the proceeds of trafficking (28%); and the misuse of digital currencies (26%).

The pattern of attacks across the financial services sector was also of interest, appearing to vary depending on the type of institution. While just under half of banks (45%) indicated exposure to money mules during the previous 12 months, that rose to 56% among building societies and 60% for challenger banks. Equally, exposure to the criminal use of third parties was reported most often by building societies (44%), asset management firms (43%) and private banks (42%) – with the latter also more likely to report exposure to the proceeds of

trafficking (42%). With no single financial crime emerging as most common, criminals appear to be targeting different types of financial organisation with specific methodologies, based on where their controls are perceived to be weakest.

Worryingly, this appears to be just the tip of the iceberg, given the difficulty firms across the spectrum report in recognising the patterns and behaviours associated with these complex financial crimes. The study revealed many financial institutions to be less than fully confident they can detect many of the most prevalent crimes cited. Only just over half (54%) of wealth management firms are fully confident they can they can detect emerging crimes and criminal methodologies and 27% admit to having ad hoc processes for identifying and tracking new types of financial crime. A further 16% have a process for identifying new types of crime, but not for tracking their evolution or assessing their potential impact to the business.

What is more, this onslaught doesn’t show any sign of easing. Almost a third (32%) of firms expect their exposure to money mules to increase in the next 18-24 months, with almost the same proportion (29%) expecting to see criminals using third-party advisers more prevalently. Across the board, in fact, the report shows that the majority of compliance professionals expect exposure to these types of financial crime to increase or remain the same over the next 18-24 months, as opposed to decrease.

So, the balance, and the onus, is still tipped heavily towards people, when it comes to compliance, despite the clear benefits of using technology to automate processes, which would allow firms to redeploy human expertise to where they could add most value, in carrying out cognitive and risk-based analysis.

Meanwhile, the latest government statistics indicate that at least $100bn is still being laundered annually through the UK, with only around 1% being detected. If financial crime continues to rise exponentially and firms continue to invest two thirds of their compliance budgets in people, then the fear is that far from narrowing the gap, it will continue to widen.

The Future Financial Crime Risks, 2020 report can be downloaded in full, for free, here

By Steve Elliot Managing Director, Lexis Nexis Risk Solutions UK & Ireland risk.lexisnexis.co.uk www.relx.com

As financial crime becomes more targeted and sophisticated, the cost of compliance for organisations is mounting – but strikingly, the evidence suggests they’re not spending it in the most effective way. Firms responding to the survey – from wealth management to banks – all told a similar story when it comes to their compliance budget split, spending twice as much on people (64%), as compared with technology (36%), with regulatory reporting, rising alert volumes and higher salary demands of skilled professionals cited as key reasons for additional labour costs.

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AUTUMN 2020

NEXT-GEN MODEL C-SUITE VIEW WHY COVID-19 HAS ALLOWED THE C-SUITE TO SHIFT FOCUS TO NEXT-GENERATION WEALTH BUSINESS MODELS Wealth managers are responding to the pandemic by accelerating change. Proven frameworks can help them deploy new strategies and win new clients, writes Ian Woodhouse

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The coronavirus pandemic appears to be triggering a rethink about business models and strategy among wealth managers (WMs).

Regional lockdowns and social distancing have made it far trickier to sign up new customers, especially where WMs operate across borders as they make remote international contact in particular more challenging.

While domestic client growth can still be achieved, cross-border growth is currently much harder than before.

The timing could not be worse. Even before the pandemic, WMs were facing significant structural challenges, including margin pressure, increased competition, evolving client priorities, rising legacy IT costs and a shortage of advisers. As a result, the sector is now hard-pressed to secure a much-needed stream of net new money. Given the current circumstances, one of the best routes to this is through remote client/ advisor interaction.

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ACCELERATING CHANGE The pandemic, coupled with the seismic social and economic upheaval, has acted as a spur to accelerate much needed change. When we questioned the C-suite for the latest Orbium/ Accenture Wealth Management Survey, only 22 per cent expected to change their business model. Now, in response to the new landscape, some wealth managers are developing new, more scalable and efficient models to meet changing investment trends and serve the next generation of wealthy clients.

Late last month, Credit Suisse, for example, announced a major restructuring.1 The bank said it was creating a single, globally integrated investment bank to achieve critical scale. It also created a new sustainability, research and investment solutions function at board level and combined its risk management and compliance functions to put more focus on sustainability and unlock potential global synergies. The changes, it said, were “intended to improve

effectiveness, drive efficiencies and capture future growth opportunities.”

Effectively, the venerable bank is pivoting their model towards a more asset management style approach in contrast to the way a traditional wealth manager’s value chain has been run in recent years.

Such new models make perfect sense in a world where investments are increasingly global, sustainable and more sophisticated, but where client management and product distribution need to be local due to region-specific regulation and suitability requirements.

Meanwhile, NatWest, parent of wealth manager Coutts, recently announced changes designed to extend its WM operations by moving into the fastdeveloping affluent client segment.1 It is offering an advice proposition targeted at helping clients make the best investment decisions from the early years of wealth creation right through to post-retirement. Part of this includes the wider use of technology to more efficiently scale the provision of this

advice. At the same time, Deutsche Bank announced changes to combine businesses to scale its international private banking business to better address the shifting market dynamics mentioned above. 2 But it’s not just a WM’s business model that needs changing to achieve growth. More than ever, wealthy clients want their advisers to be “more like them”. For example, if they’re interested in investments relating to ethical, social or corporate governance (ESG), they want experts in this field.

Women may often want female advisers. And clients increasingly want to know that the firms they are working with share their values. This means recruiting and training not just more women or those with the right skills and ESG experience, but also ensuring these attributes are represented at board level.

Clients also want more timely, proactive and personalised advice with recommendations across both assets and liabilities at critical points in their family or business lives. The announcements above recognise these shifts and demonstrate the rise of next-generation, more connected advisor models accompanied by well- focused organisational and technology changes.

A PROVEN FRAMEWORK AND FLEXIBLE MODEL What does this mean for the C-suite?

It means a changing agenda to make the banks more dynamic, nimble and responsible. It’s about understanding and being able to respond to new

market conditions and changing client demands. Only then can a WM be confident of attracting new money to grow and secure its future. However, getting the new model right and implementing it is a complex task.

Success depends on multiple variables such as designing and implementing new client engagement and servicing models, adopting new technology enablers and driving change in advisor behaviours as well as the timing and sequencing of change. In many cases, wealth managers don’t have the necessary skills in-house to assess where their key performance and opportunity gaps are. What they need is a proven framework to produce a phased road map for change that is specific to their circumstances. Such a framework allows that the focus falls on the right areas so all parties – the WM, the advisors and the clients – end up with the right scope of change, the project moves at the right speed and the outcomes can be correctly sequenced and scaled efficiently.

against those of peers to give a clear idea of gaps in the current model and how competitive the business outcome would be. Get it right and the resulting investment would lead to higher growth and lower costs.

Missteps and mistakes will eat away at growth and returns.

As in so many areas of business and society, Covid-19 is accelerating an emerging trend: more wealthmanagement C-suites than ever are looking at their business models and finding them wanting. Those that use a proven framework to help them assess what needs to be done and how they should proceed in a phased way will likely reduce risk and get them where they want to be faster.

By Ian Woodhouse Head of Strategy and Change at Orbium - part of Accenture Wealth Management www.orbium.com

The process involves examining current versus required client interactions and channels, as well as products and solutions. It can also examine current and proposed models

@PIMFA_UK

1 https://citywire.co.uk/wealth-manager/news/coutts-ceo-lands-top-job-in-major-natwest-wealth-shake-up/a1390544?utm_ source=EmailAFriend_Article&utm_medium=EmailAFriend_Article&utm_campaign=EmailAFriend_Article

2 https://citywire.co.uk/wealth-manager/news/deutsche-bank-merges-wealth-units-to-launch-global-private-bank/a1366936

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AUTUMN 2020

SHINE A LIGHT ON YOUR BUSINESS

Managers must understand which communications are relevant to client needs and are consistent across all channels, with a choice available so that no client or employee group is discriminated against.

“IN 70% OF IIC ACCREDITED FIRMS, MANAGERS BELIEVE THEY ARE DOING FAR BETTER THAN THEIR CLIENTS SAY” Research conducted for a leading financial services firm discovered

that:

•

3) TECHNOLOGY Even luddites have had to embrace technology during lockdown! The start of isolation saw people who were barely IT literate joining in Zoom quizzes and chatting to relatives through their devices but it is still important to avoid a two-tier client base by finding ways to support those that need more help.

Similarly, avoiding a workforce that is split between those that meet physically and those that only connect virtually is critical.

Managers must establish that technology is fit for purpose and that training is in place to ensure that staff (and where appropriate clients) are able to use it effectively and safely.

CLIENTS

•

•

•

STAFF

•

•

Struggled to reach the right contact and weren't called back Recieved poor communication on investement activity Complained about lack of transparency Were concerned about a lack of interaction with other teams Had limited faith in management to act decisively Struggled to cope with unreliable and outdated technology

W The findings helped the firm to focus on the things that matter most

IT’S TIME FOR PIMFA MEMBERS TO EMBRACE CHANGE

N

ow more than ever, it is essential to know how the needs of your clients and employees have changed and what you must do to meet those needs to retain their loyalty and drive profitability.

At Investor in Customers (IIC) we have been working with financial services organisations for almost 15 years, shining a light on their business to highlight the strengths and weaknesses in their client experience and employee engagement strategies and identify improvements that lead to better, more sustainable businesses.

Recent work has shown three key areas managers must focus upon:

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1) LIFESTYLE

2) COMMUNICATION

Employees either can’t wait to get back to the office or don’t want to leave home. You will never satisfy everyone all the time but discovering what suits each individual and putting in place systems and procedures that give employees autonomy, will deliver greater productivity.

When it comes to channels, one size certainly doesn’t fit all. The vital thing for clients is to have choice in being able to achieve everything they need - however they contact you. Organisations that hide contact phone numbers typically score very low in customer satisfaction as do those who engage in ways that suit their needs rather than their clients.

Long standing client relationships mean little if you fail to adapt, but firms responding to how clients now want to do business will benefit from even stronger relationships and a willingness to support firms that have their client’s interests at heart.

Managers need to actively seek client feedback and make sure that their teams understand and focus on client needs, first time – every time.

The same applies to employees, with the added complications of sharing information and making sure employees have regular breaks from their computers. It is also critical to establish internal support channels to allow staff to express concerns or raise queries quickly and confidentially.

The FCA discussion paper on transforming culture (DP20/1) suggests some of the ways firms need to change to engage better across a broader spectrum. Covid-19, in some ways, makes change easier by making people more receptive, but only for those firms that understand how client and staff needs have changed and what they now must do.

For PIMFA members, now is the time to exploit the advantages that are available rather than seeing change as a thing of evil. Not every client meeting has to be face-to-face (or mask-to-mask); a choice of meeting options should be available, but these must be directed by the client not the adviser. Technology can also be used to speed up the time taken to get things done.

The pandemic has also broken down boundaries. Firms no longer have to restrict themselves to one location. Willingness to engage online means no client is off limits and employees can be attracted from far and wide.

So how well do you know the needs of your clients and employees? If you don’t the simple answer is to ask them - after all, it’s difficult to treat your key stakeholders fairly if you don’t know what they want!

To shine a light on your business contact:

By Tony Barritt Managing Director Investor in Customers Ltd investorincustomers.com

There may be no normality in the new norm but discovering how to meet customer and employee needs, and in doing so delight them, is illuminating. The alternative, doing nothing and continuing to operate in darkness, could be catastrophic.

@PIMFA_UK

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AUTUMN 2020

THE BUILDING BLOCKS OF A RISK MANAGEMENT STRUCTURE THAT CAN DEFEND AGAINST RANSOMWARE INCLUDE:

I KEEP READING ABOUT RANSOMWARE ATTACKS. WHAT ARE THESE AND ARE THEY ON THE RISE?

Cyber Doctor Powered by

Ransomware is a form of malicious software which encrypts your data so it’s impossible to access information.

The criminals behind the software demand a ransom, saying they’ll give you the key to decrypt it if you pay up.

If you do hand over the ransom, you still can’t prevent the criminals using the data to mount further cyber attacks. This could be on you, your clients, or your business relationships.

It might include targeted phishing attacks against your staff and clients; or they might sell the data to other criminals.

I RUN A MODESTLY SIZED IFA BUSINESS. WILL MY FIRM REALLY BE OF INTEREST TO CYBER CRIMINAL GANGS? Sadly, the answer is yes. Regardless of your size or location, your business is a target for cyber criminals.

Organised gangs design attacks using automated, sophisticated techniques. Once a vulnerability – a breach in your systems’ defences – is found, the gang swoops in and more focused attacks follow.

IF WE DO GET ATTACKED WON’T BACK-UPS SOLVE THE PROBLEM? Not anymore. The new method of attack involves the theft and public release of all confidential data, so even perfectly configured back ups cannot protect you or your clients.

www.pimfa.co.uk

cybersecurity pillars of technology, people and process

It’s true that ransomware cases are increasing. They have done so threefold during the past year. Criminals are also demanding higher ransoms, with the average payment being $178,000 according to the latest research. However, bigger firms can be hit for much more.

The stakes have got higher in 2020 because criminals have added a further demand into the mix. Their new tactic is first to steal a copy of your data, then to encrypt the version on your system. They then threaten to publicly release your – and your clients’ – confidential data piece by piece unless you meet their price.

The resulting business disruption and damage to client relationships and reputation could end up costing far more than the ransom itself.

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a risk assessment across the three

technical vulnerability assessments and scanning awareness training for your team a control framework to manage risk The fact is though, most firms’ back up systems are unlikely to have been tested based on a ransomware scenario – and that means historic back-ups are at risk of being overwritten.

In our experience, few businesses correctly configure back-ups to enable them to restore everything.

Back-ups often end up as copies of the corrupted versions of the data.

IN THAT CASE, HOW CAN I ENSURE MY FIRM IS PROTECTED FROM RANSOMWARE? CAN’T OUR IT GUYS HANDLE THIS BY SIMPLY INVESTING IN SOME NEW SOFTWARE? No. We suggest speaking to cybersecurity experts for specialist help in protecting against ransomware. With the best will in the world, most IT people – whether in-house teams or third-party consultants –are not experts in the intricacies of cybersecurity, which includes much more than just your technology. Leaving your defences to them would be like asking your GP to perform heart surgery.

ongoing assessments

These are also legal and FCA requirements and non compliance should worry you.

We’re often contacted when a ransomware attack is already under way. Please don’t wait until you suffer a ransomware breach to test the resilience of your systems: do it now.

CYBER DOCTOR POWERED BY MITIGO To get your question featured in the next edition of Cyber Doctor email your questions to cyberdoctor@mitigogroup.com.

Mitigo provides specialist cybersecurity services to the financial services sector, covering technology testing, people training and governance, and ensuring legal and regulatory compliance. All for an affordable monthly fixed fee. http://www.mitigogroup.com/pimfa

@PIMFA_UK

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PIMFA JOURNAL

AUTUMN 2020

THE INSURANCE MARKET LOOK OUT THE EVER-CHANGING INSURANCE MARKET AND THE FUTURE OF TERMS AND PRICING

W

ealth Management and Financial Advisory, although closely linked and in some firms co-located under one roof, are often dealt with by two entirely different sets of insurance underwriters. Typically, Financial Institutions underwriters work with Wealth Managers and Professional Indemnity Insurance underwriters work with IFAs. This involves two separate profit centres, different experiences and different concerns.

This has meant that insurance brokers have also grown up with two separate teams. Howden is diffierent in that it has experts from both fields working in unison and in this article experts from the Howden team provide a commentary on the current insurance market for Wealth Managers and IFAs and what they expect to happen in the near future.

WEALTH MANAGERS The Financial Institution (FI) insurance market has followed the trend of the insurance market at large; between 20102018 the supply of capital and underwriting appetite was reasonably abundant and brokers were therefore able to negotiate improved pricing and broader cover at almost every renewal – so long as the Wealth Manager’s risk profile hadn’t materially altered (claims, acquisitions etc).

By the summer of 2018 insurers’ margins had evaporated, the inevitable result of eight years of increasing cover and diminishing rates, coupled with increasing claim frequency and severity. In 2019, Lloyd’s of London was forced to review all of its syndicates’ strategies and so began the start of a hardening market. More recently, the Covid-19 pandemic has inevitably caused further disruption.

Now the current economic downturn and continued uncertainty creates further potential liabilities for financial institutions from an insurance perspective. Our market data has average premium hikes for a like-for-like renewal currently between 10% and 20% for a Wealth Manager depending on the size of the limit purchased; and it’s important to work closely with your Broker to ensure you are at the lower end. Other FI sectors such as Private Equity are well in excess of that.

LOOKING TO THE FUTURE This market correction is predicted by Paul Towler, Howden’s Chief Broking Officer, to be the most significant since the 1986-1987 ‘Lloyd’s crash’ and further premium increases are likely at next renewal, on top of those incurred at this renewal. Quite how long the hard market endures will depend largely upon the inflow of ‘new’ underwriting capacity. The good news is that this can happen quite swiftly, as it did post the financial crash hard market in 2008-2009, but quite when capital providers will deem the moment right this time round remains to be seen.

According to Howden, it is now crucial to mitigate the increases; •

•

•

•

•

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Your insurer relationships should be properly leveraged hopefully your broker has spent time doing this for you, finding ways to put your business first on an insurer’s renewal list Ensure your specific risk differentiators are properly understood, articulated and factored into the pricing by underwriters. Your broker should guide you You are given time to provide the right information to insurers. There is no excuse for being last minute, especially in the current climate Be inquisitive and challenge your broker. Make sure they understand your sector, have the experience to deliver and are speaking to all of the market Consider the limits you buy, your renewal dates and your insurance structure. Is this the right fit for your business and how has this been tested? Do you have confidence your coverage is fit for purpose in the event of a claim?

@PIMFA_UK

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Remember that whilst pricing is a factor, be careful, the robustness of your cover is vital. Your broker should have an answer for that too! Ask them.

John Greene

Lindsay Ratcliffe

Divisional Director Howden www.howdengroup.com

Divisional Director Howden www.howdengroup.com

•

We have found that there is a lack of insurance capacity for IFAs. With only five or six insurance markets and a general lack of interest in new business the ability to source competitive alternative quotes is extremely limited

•

Insurers’ concern over the now maximum FOS award of £355,000

•

The FCAs continuing investigation of the firms that gave DBT advice

Pricing

The IFA world is not dissimilar to the message above, but certainly the financial press is full of more tales of woe for Financial Advisers: increasing FCA fees, increasing FSCS levies, reducing income and massively increased Professional Indemnity Insurance (PII) costs.

Whilst we have a view on all of the above, the PII market and the actual costs of policies is the focal point for this article.

Insurance coverage/policy cover

Premiums

IFAs

Any firm which has had a recent renewal will know that premiums have increased, in fact they have done consistently for two years now, but a look at the table below compiled from the FCA’s own figures ¹) will put the premium rates into context.

May 2018

Apr 2019

Jul 2019

Mar 2020

Lloyd's review of

FOS limit from

FCA report

Reccession

poor performing

£150k to 350k.

(CP19/25) on

Covid-19 and

syndicates and

cliet detriment

Brexit.

lines of business.

as a result of unsuitable pension transfers.

Total Turnover of IFA Premium

Ave Premium

Number of firms

Ave revenue

PI Prem as %’age of revenue

Up to £100k

£2.35m

£2,580

910

£58,557

4.4%

£101k £500k

£15.4m

£6,802

2,264

£247,000

2.8%

£501k £10m

£60.3m

£43,833

1,375

£1.34m

3.3%

Over £10m

£32.2m

£1.03m

31

£75.9m

1.4%

WHAT ARE WE DOING TO HELP IFAs? As an insurance broker, and specialists on behalf of the profession, Howden are working hard to find new insurers to enter this market place and clearly it will only be at this stage that some sense of normality will return. We strongly believe that insurers’ concerns around this profession are unfounded with, for the considerable majority, a keen sense of doing the right thing for their clients in a suitably compliant fashion.

We are advising our clients to:

Our figures tend to be a little lower per band. It is of course very difficult to generalise, so a firm which has undertaken a significant number of Defined Benefit Transfers (DBTs) will likely pay a very different premium to one that doesn’t, as will a firm which has had a number of claims in the past compared to one that is claim free.

•

Pay attention to the detail and add supplementary information to their proposal forms. You are using this to sell yourself to the insurance underwriter. While people are working remotely and with huge workloads, a badly completed form or one that is difficult to read, may go to the bottom of the pile.

•

Discuss the timing of your submission with your broker. Get information together in plenty of time and leave time in case there are additional questions.

All insurers, whatever the profession of their client, are interested in how your business has been impacted by the pandemic. So, include a few paragraphs around how you have been working, how compliance and regulatory responsibilities has been catered for and what has happened to your income.

• However, to build on John’s macro points above regarding the insurance market itself, the state of the UK economy both from a Covid-19 recessionary basis and from a bad Brexit, what else is driving these IFA figures, bearing in mind average rates for IFAs were between 1% and 1.5% (depending on business mix) for a number of years?

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Steve Ray Divisional Director Howden www.howdengroup.com

¹ https://international-adviser.com/advisers-forked-out-110m-on-pi-insurance-in-2019/?utm_term

@PIMFA_UK

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PIMFA JOURNAL

AUTUMN AUTUMN EDITION 2020

PIMFA COMPARE MY ALLOCATIONS REPORT For over 20 years PIMFA have provided the wealth management community with a suite of indices that reflect how UK wealth managers invest on behalf of their clients across a number of investment strategies and asset classes. We are now pleased to provide firms with further insights into this rich data set, to show how the strategic asset allocations (SAA) of your firms model portfolios compare to your peers’.

The PIMFA Compare My Allocations report shows how the strategic asset allocations of your firms model portfolios compare to the survey peer group across 23 asset classes using a Risk or Objective based sorting methodology.

THE REPORT HAS 3 SECTIONS: SECTION 1

SECTION 2

SECTION 3

Key statistics – Survey data overview including other firms that have participated in this quarters survey.

Higher or lower – Are your firms’ model portfolio allocations higher or lower than this quarters’ survey submission averages?

Range allocations – Where do your firms’ model portfolio allocations sit within the range of survey submissions across 23 different asset classes?

New sections and features are added regularly to provide more insights

CRITERIA FOR SUBMISSION This report is available to firms that: • • •

Invest directly on behalf of private clients Run model portfolios Provide PIMFA with the SAA of their model portfolios on a quarterly basis

SUBMISSION PROCESS Firms submit the SAA of their model portfolios to the, access only, PIMFA Indices Area. Each quarterly survey submission can take as little as 20 seconds to complete.

DATA PROTECTION We understand the sensitive nature of the information that you provide to us in the quarterly asset allocation survey and take the necessary steps to ensure that your data is kept as safe and secure as possible.

COST

£

This quarterly report is available for FREE to PIMFA members firms, complimentary as part of your firms PIMFA membership.

If you would like more information or a demonstration of the survey and CMA report, please email indices@pimfa.co.uk.

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@PIMFA_UK

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The Personal Investment Management & Financial Advice Association

@PIMFA_UK www.pimfa.co.uk

Would you like to contribute an article?

Alongside updates from PIMFA, the Journal includes several useful inputs from our associate member firms. These articles are an excellent opportunity to gain interesting insights into the wider industry and to learn more about PIMFA associate members. If you are an associate member who is interested in contributing to future editions of the Journal then please contact: Richard Adler, Director of Strategic Partnerships (richarda@pimfa.co.uk) or Sheena Gillett, PR & Communications Director (sheenag@pimfa.co.uk)

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