March, 2022

PIMFA.CO.UK

JOURNAL WINTER 2021/ SPRING 2022 Building Personal Financial Futures

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WINTER JOURNAL | 2022

BUILDING PERSONAL FINANCIAL FUTURES

CONTENTS

04.

HOW TO AVOID LEGACY TRAPS WHEN BUILDING DIGITAL WEALTH SERVICES

06.

A NEW HOPE FOR WEALTH AND INVESTMENT MANAGERS?

12.

DID COP26 DELIVER?

15.

NO PRIVATE RIGHT OF ACTION (PROA) FOR BREACH OF THE CONSUMER DUTY IS NOT AS STRAIGHTFORWARD AS IT SEEMS.

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THE APPOINTED REPRESENTATIVES REGIME – CHANGE IS COMING!

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THE RACE TO RESHAPE WEALTH MANAGEMENT BUSINESS MODELS IS ON

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MORE THAN JUST A SHORT TERM FOCUS

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THE MOVE TO NET ZERO

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HOW WEALTH MANAGERS ARE RESPONDING TO A UNIQUE SET OF MEGA-TRENDS THAT ARE PUTTING PRESSURE ON FIRM PROFITABILITY AND CLIENT RETENTION

38.

MAKING TAX DIGITAL FOR VAT CHANGES: WHAT YOU AND YOUR CLIENTS NEED TO KNOW AHEAD OF 1 APRIL 2022

43.

OPERATIONAL RESILIENCE: IS OUTSOURCING ON YOUR RADAR?

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HOW TO AVOID LEGACY TRAPS WHEN BUILDING DIGITAL WEALTH SERVICES Wealth managers often build customer journey islands when introducing a new service or feature. Opting instead for use case-agnostic technology that supports all components of the organization’s strategic roadmap can grant a financial institution the necessary flexibility to achieve a strategic freedom to innovate.

In theory, there could be no better moment to upgrade a financial business. The pressure is on - a traditionally conservative industry is expected to match the quality and efficiency of their digital channels to the likes of the well-known tech and entertainment giants. The technology is there – the combination of open banking and advanced financial analytics can make wealth management services more scalable and inclusive than ever. In practice however, incumbents continue to release siloed customer journeys, struggling to manage the infrastructural challenges and falling deeper into legacy traps.

Legacy infrastructure is undoubtedly one of the most common obstacles for innovation in the established financial industry. Antiquated software still runs key processes within banks, insurers, and wealth managers. These legacy systems are often incompatible with the components of modern digital and hybrid channels and updating them is expensive and cumbersome. Still, legacy challenges seem imminent because they are a by-product of innovation processes accumulated over decades.

However, with the right approach to innovation it is possible to optimize the architecture of new

solutions to prevent the legacy traps at least a few years down the line and build consistent, reliable and holistic digital experiences.

The most common mechanism of falling into the legacy trap is closely connected to a classic approach to innovation. It would typically entail starting with a small use case, testing it and, if successful, rolling it out in production. Therefore, when a bank, an insurance company or a wealth manager builds a new customer journey, they typically build an isolated functionality based on a specific use case. We call these isolated pieces of functionality “customer journey islands”. At this point, the plan is to build and market a simple yet innovative service and let it grow and develop within the product line of the institution.

Fast forward one year and the institution’s innovation team comes across a new functionality that they believe would tap into the demand of their customers.

They build yet another customer journey island.

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There are several benefits of use case agnostic technology:

There are a few issues that may arise at this point: First, every additional isolated journey would add very limited value to the customer unless it considers the context of the previous relationship between a customer and the organization. An individual could have been using the institution’s services for years but unless these financial journeys are connected, you miss out valuable information which could help recommend your client to the most suitable product or action.

Second, if your strategy involves adding more use cases to the existing isolated journeys, you may need to be prepared for integration issues. It may be so tough to tie the customer journey islands together if they were not designed to work together from the beginning, that some organizations would prefer to build the journeys from scratch or abandon the project altogether.

While starting small is a good idea in most cases, all the changes you decide to pursue should come with a long-term vision. Therefore, technology that you use for your first steps should be able to withstand the scrutiny of the real-life conditions and be flexible enough to be continuously reviewed and updated with additional features way into the future. One way to pursue this strategy is to rely on use case agnostic components of the future digital experiences, such as financial analytics, and then integrate those across your customer journeys.

Furthermore, you should consider an API-only approach for vendor solutions, which helps immensely if you strive to achieve an holistic approach to end-customers relationship with your institution.

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To start with, it can help you make sure that the results of financial calculations throughout your customer journeys are consistent as you continue to grow your business.

Second, you can dramatically shorten timeto-market due to simplified decision-making among the stakeholders. In our experience, navigating internal communications becomes a lot faster when the feature components are already in place for initial use case(s).

Third, when you have built up several journeys or use cases, you can easily then tie them together into a more complete whole. This is what will continue to add value to your customers and this, in turn, will keep your customers engaged over time.

In the context of accelerated digitalization, legacy challenges are likely to occur much faster. In this environment, a strategic approach to selecting technology powering your digital wealth services becomes critical to achieving high flexibility and speed of your innovation process. Therefore, it might be a good idea to start with reviewing your roadmap and ensuring that the technology you select supports all the use cases you are planning to build and enables you to adopt an holistic approach to your institution’s relationship with every customer. This way, you not only avoid the integration issues that inevitably come with customer journey islands, but also ensure that, in time, you can build an holistic, consistent, and robust service that secures your position in the new reality for years to come.

FREDRIK DAVEUS, CEO, KIDBROOKE

www.kidbrooke.com

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A NEW HOPE FOR WEALTH AND INVESTMENT MANAGERS? The pressure to achieve growth is constant. Therefore, the greatest challenge to our wealth management industry in continuing this level of growth is how to scale the business and replicate the success model without incurring a burdensome level of additional costs.

Front-end digitisation in wealth management has been lagging behind many other consumer-facing industries, and hardly keeping pace with rising customer expectations. At the same time, IT and operations need modernisation. Many wealth firms still remain saddled with manually intensive processes and complex servicing arrangements, leading to high operating costs, in a scenario of lower margins, fierce competition and ever more demanding regulation.

Investments in digital technologies are helping managers innovate and offer investors more hyperpersonalised, data-driven advice and engagement models. Data is fast becoming a core competency, and those firms who will be able to convert it into actionable insights will lead the industry.

Furthermore, as wealth firms look to integrate their front, middle and back office processes and solutions, the lines between these traditionally siloed functions will blur.

The greatest challenge to the industry to continue the current level of growth is most likely to be how to achieve scalable and cost-managed growth.

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A day in the life of an adviser Taking a deep dive into the role of advisers, within the next decade they will gradually shed their role as investment managers to advise clients on their financial wellness needs more broadly. In order to profitably serve customers, they will need to be radically leaner than they are today and set a rising bar for operational excellence.

Today, advisers manage typically around 200 or so portfolios on an ad-hoc basis. If the firm scales up and the adviser is dealing with in excess of 500 portfolios, the logistics of reviewing each thoroughly and taking any required actions on a daily basis becomes unrealistic. Outside of the increased number of portfolios to manage, other challenges come on top: increasing volumes of data to consume, more rules surrounding the management of the client mandate to monitor, more regulatory guidelines to comply with, all leading to less time to manage an individual portfolio.

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Where can technology assist?

This is where technology can assist advisers and enable them to focus their valuable time and efforts where they are required. Technology can reduce the burden of time-consuming repetitive daily activities through Smart Advisor Desktops acting as “digital assistants” to help.

Coming to the practical daily workday of a wealth or investment manager, let’s consider some of the time-consuming activities.

1. Compliance and continuous monitoring The number of compliance rules to check within investment portfolios is growing every day. Balancing risk against return is becoming more complicated but, by using technology, this can be done in the background, continuously and automatically generating alerts when breaches occur. Using intelligent assistance can help proactively prevent breaches, reduce risk and recommend new investment ideas to act faster and more efficiently.

2. Consistency between pre and post trade checks As an advisory business, you need to be proactive in making proposals or dealing with clients requiring advice. An AI-based checking engine can automatically check investment decisions, to ensure suitability before trading. Rebalancing can be executed more proactively because the digital assistant is continuously looking at investments and their objectives, therefore suggesting different courses of action that recommend how best to change the portfolio to achieve the best return.

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3. Alerts driving efficiency and adding value to advisory A digital assistant can help looking across all information in the book of business at a glance, and then prioritises the tasks needed today, this week, next month and so on.

Indeed, a branch manager or divisional manager can also have a team Smart Desktop that consolidates what is happening within their area of responsibility.

Using a Smart Desktop digital assistant approach provides a sharp shortcut to tasks, exploiting a large amount of existing data from multiple sources and consolidating everything in one place to help manage a book of business more efficiently, making the firm more effective and improving headcount ratios. The focus and effort is then only on automatically highlighted exceptions, whilst the remaining book of business is being maintained, is compliant and on track to meet a client’s goals.

The Smart Desktop approach ultimately enables a firm to effectively manage more clients, deliver more focused attention where it is needed and concentrate on growing the business.

To know more on how to achieve growth in the current wealth management setting, download the full paper here.

DAVID WILSON, SENIOR BUSINESS DEVELOPMENT MANAGER AT OBJECTWAY

david.wilson@objectway.com

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DID COP26 DELIVER? The dust has now settled on the 2021 UN Climate Change Conference (COP26). Did the gathering of almost 200 nations succeed in putting us on a path towards limiting warming to 1.5°C?

COP26 concluded with the signing of the Glasgow Pact, which agreed to “keep 1.5°C alive.” Some of the agreements made include strengthening 2030 emissions reduction targets, annually revising these targets and a “phase-down” of coal.

However, post-COP26, many felt an air of deflation. Alok Sharma, president of COP26, said: “We’re all well aware that, collectively, our climate ambition and action to date have fallen short on the promises made in the Paris Agreement on climate change.”

Some areas of concern There was a lack of visible commitment and priority from some of the world’s largest polluters. Notably absent were national leaders from China and Russia, the largest and

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fifth-largest contributors respectively of national carbon dioxide emissions.

However, China did issue a surprise declaration on Enhancing Climate Change Action in the 2020s in partnership with the US. There is a legacy of failed pledges – most famously the unfulfilled pledge for $100 billion in climate finance for developing nations by 2020. It is therefore unsurprising that headline-grabbing pledges made in the first week of COP26 have been overshadowed by inevitable questions around whether they will be realized. Then there is the failure of some countries to commit to net zero by 2050. India’s commitment to reach net zero by 2070 was a notable announcement at COP26. A significant step, certainly, but 2070 net-zero commitments will not restrict warming to 1.5°C.

Reasons for optimism

What does this mean for indices?

There were many pledges and commitments made at COP26. In addition, COP26 provided a platform for smaller nations. Though the limelight focuses on high-profile politicians and the crucial pledges of large nations, the conference was an important forum to also hear the pleas of smaller nations that may produce little in terms of greenhouse gas emissions, but may face the negative consequences of climate change.

As a provider of climate benchmarks, we closely follow developments at all UN Climate Change Conferences and evolving investor requirements. Increased demand from asset owners and commitments made by asset managers to account for climate change in their portfolios result in more interest surrounding net-zero-aligned indices.

COP26 represented a great opportunity, not just for official delegates from nations to gather but also for the wider community to lobby for change. For example, the Fairtrade Foundation supported the participation of a delegation of farmers whose livelihoods are threatened by climate change. Local campaigners demanded climate action from politicians.

Climate change is climbing agendas, and this rise is facilitated by high-profile events such as COP26. Climate issues are now covered more comprehensively in the media and are better understood by the wider population, and there is broad support for the idea that action needs to be taken.

Many companies have, for some time, recognized their ESG responsibilities. It is positive to see segments of the private sector demonstrating an understanding of the risks and opportunities specifically regarding climate change and committing to net zero by 2050. During COP26 there was a notable announcement through the Glasgow Financial Alliance for Net Zero (GFANZ) to commit more than $130 trillion of private capital to transform the economy to align with net zero.

The S&P PACT indices (S&P Paris-Aligned & Climate Transition Indices) are 1.5°C-aligned and available in several regional exposures, with the S&P UK Net Zero 2050 ParisAligned ESG Index being the most recent addition.

S&P DJI is committed to providing transparency on the methodology of its indices and regularly discloses how the sustainability objectives of its S&P PACT Indices are met.

Time will tell if COP26 will be remembered as a success. In the meantime, S&P DJI will continue to produce rules-based indices that align with a 1.5°C scenario to help investors on the path to net zero.

JASPREET DUHRA MANAGING DIRECTOR, GLOBAL HEAD OF ESG INDICES, S&P DOW JONES INDICES

Vist our Net Zero Solution Page

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NO PRIVATE RIGHT OF ACTION (PROA) FOR BREACH OF THE CONSUMER DUTY IS NOT AS STRAIGHTFORWARD AS IT SEEMS. In its second Consultation Paper on the proposed Consumer Duty (CP21/36), the FCA has confirmed that it does not intend to introduce a PROA for breaching any part of the Consumer Duty “at this time”.

Whilst this deviates from the usual position (that, for breaches of most FCA Rules, there is a PROA by reason of section 138D FSMA 2000), the FCA’s rationale is that the proposed Consumer Duty is “unusual in that it is a package – comprising a principle, cross-cutting rules and outcome rules”.

It has taken the view that allowing the industry adequate time to embed the Consumer Duty, without the prospect of a private civil action being brought, is important to fully realise the consumer benefits that the FCA aims to deliver.

In its Feedback Statement in 2019, the FCA confirmed that it would consider the potential merits and unintended consequences of introducing a PROA for breaches of any new FCA Principle. In CP21/36 the specific issue on which the FCA sought views was the introduction of a PROA for breach of the proposed new Principle.

Many, including PIMFA, identified significant issues in introducing a PROA for breach of a broad-based statement of a regulatory obligation. The FCA has discounted that option for now but has gone further and decided against introducing a PROA for a breach of any part of the Consumer Duty, including any specific rules that it introduces. It appears that the FCA intends to give effect to this decision by “switching off” the rights that would otherwise exist under section 138D. This would

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also mean that rights under the FSCS will not be available, nor will a consumer redress scheme under section 404 FSMA be an option for the FCA as both are dependent on a civil remedy being available by way of court proceedings.

The FCA considers that, rather than permitting court action for breach of any new rule, the existing redress framework, and in particular the right to complain to the FOS, is likely to be a more appropriate route for all consumers seeking redress, given the aim of allowing individuals to pursue claims at no additional cost and without representation. The FCA acknowledges that this will exclude claims which exceed the FOS compensation limits but justifies this on the basis that the pool of affected claims would be small.

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On the face of it, the FCA’s approach takes account of the concerns of the industry about increasing the potential for unmeritorious claims given that, in general, most well-managed firms do deal with complaints fairly and offer redress appropriately. However, we anticipate that the FCA’s decision to “switch off” the rights that would otherwise exist under section 138D will be regarded by consumer groups as perverse and possibly judicially reviewable. In that regard, the FCA’s approach does raise certain questions which CP21/36 does not address.

Importantly, will the FOS have the time/resource to deal with all Consumer Duty claims? How will the FOS develop a consistent approach to the determination of such claims, bearing in mind the absence of guidance from the courts as to how rules should be interpreted and applied? Will the FOS essentially simply follow the FCA’s guidance on the interpretation and application of its own rules because there will be no judicial guidance on how they should be applied?

It is easy to foresee situations where a breach of a proposed Consumer Duty rule is also a breach of existing rules under the Handbook, where a statutory cause of action will still exist. At present, claims do arise where there may be a cause of action under section 138D for, say, breach of a COBS rule, but also for breach of contract or negligence or, in extreme cases, even fraud.

Following the introduction of the Consumer Duty, a retail customer’s complaint might involve both a breach of the proposed new duty to avoid foreseeable harm and also the client’s best interests rule under COBS. Such a consumer could still bring a civil claim for breach of COBS but not for breach of the Consumer Duty.

The Court would have to assess the claim against the (apparently) lower COBS standard because it would be prevented from considering the claim based on the breach of a Consumer Duty rule. In such circumstances, conceptually at least, the Court could reject a claim on the basis that there is no breach of a COBS rule, even though, had the Consumer Duty rule been actionable, the claim would have been upheld.

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The consequence of this is that CMCs, where possible, will frame a claim by reference to the Consumer Duty.

In such circumstances FOS will not be in a position to decline jurisdiction on the basis that the matter is better suited to Court proceedings because, for example, it is factually and legally complex. The net effect is likely to be a significant increase in the volume of claims raised with FOS and decisions being made on issues which, in truth, should be the subject of much closer scrutiny.

The FOS could be forced to consider matters which involve allegations of fraud or other serious misconduct but framed in part by reference to the consumer duty to act in good faith. Claims might be upheld which a Court would reject.

The FCA intends to keep the possibility of a PROA for breach of the Consumer Duty under review. Firms will have a chance to embed the proposed Consumer Duty before any PROA might become available and to consider the effectiveness of their own complaints handling processes and procedures, which is an outcome that the FCA does want to see. How the industry responds and how FOS deals with matters is likely to have a significant bearing on whether a PROA is introduced at some point down the line.

JONATHON CROOK, PARTNER, FINANCIAL SERVICES DISPUTES AND INVESTIGATIONS, SHOOSMITHS LLP

jonathon.crook@shoosmiths.co.uk

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THE APPOINTED REPRESENTATIVES REGIME – CHANGE IS COMING! In December the FCA published a Consultation Paper 1 about improving the Appointed Representatives Regime (AR). In a coordinated move, HM Treasury also published a ‘Call for Evidence’2 on the same subject which will have given interested observers a clue to the level of concern about the effectiveness of the Appointed Representatives Regime.

For some time now the FCA have made it known that they have growing concerns about the performance of the AR regime for consumers. In their 21/22 business plan they stated, “We want principals and ARs that are competent, financially stable and ensure fair outcomes for consumers when selling products or giving advice.”

Consequently, it has been clear to see that the winds of change are blowing for the AR Regime.

If you delve into the detail that the FCA have laid out in Chapter 2 of the CP, where they provide statistical evidence that underlines the concerns about the effectiveness of the regime, it’s easy to see why the regime is scheduled for regulatory intervention in 2022 and beyond. A few of the statistics that it is worth highlighting are as follows:

FSCS:

In 2018 and the first half of 2019, ARs accounted for 61% of the value of all claims against the FSCS totalling £1.1b. That’s a staggering £670m!

Supervisory Cases:

Principal firms represent 50-400% more supervisory cases than non-Principal firms

FOS Complaints:

Principal firms have more complaints per £1m of revenue compared to non-Principals, particularly where they are smaller in size These statistics supported the findings of Thematic Reviews into General Insurance in 2016 and Investment Management in 2019 which identified ‘significant failings’ in the application of the AR regime.

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CP21/34: Improving the Appointed Representatives regime (fca.org.uk) CfE:_Appointed_Reps_Regime.pdf (publishing.service.gov.uk)

The final, important, piece of evidence indicating that the AR Regime is not working as intended came from the Treasury Select Committee’s report, (June ’21), into the Greensill scandal which identified ARs operating beyond their remit as one of the causes of the collapse of the company.

Given that the AR network in the UK is large, with over 3,600 Principal firms providing oversight to approximately 40,000 ARs, the AR Regime represents a major part of the retail financial services landscape and, if this part of the market is malfunctioning, it is a major problem!

So, the evidence is significant and indicates that change needs to happen.

But what has gone wrong with the AR Regime, which has been a big part of the retail financial services landscape for over a generation? Originally, the AR Regime was set up to enable a cost-effective route to market for authorised firms (Principals) by allowing unauthorised advisers (ARs) to sell simple products, e.g., general insurance, on their behalf on the proviso that Principals took responsibility for providing oversight and control of the AR’s conduct to prevent consumer or market detriment.

The regulator’s reasoning at the time was that it provided a cost-effective distribution channel for authorised firms, it would increase competition and it was easier for the regulator to supervise Principal firms than thousands of individuals. The success of the AR regime, however, was based on the ability of Principal firms to have both the expertise and resource necessary to provide the expected oversight and control of ARs.

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Since the AR Regime was set up in the 1980s, the financial services world has changed significantly.

Firstly, the range of products distributed by appointed representatives on behalf of Principal firms has risen enormously, as has the range of business models under which this type of arrangement typically operates.

Using the AR Regime to allow a Principal firm to have many hundreds of ARs, selling complex products on behalf of a Principal firm, I suspect was never envisaged when the original legislation was conceived.

Secondly, there are regulatory and legislative cracks that Principals and ARs have often slipped through. For example, the whole premise of the AR regime is that the Principal firm is only responsible for things that the AR does, as stipulated in a written contract between the two. That sounds fine but what happens when an AR causes the consumer harm for things done outside of that contract? Can the Principal be held accountable by the FCA? Similarly, FOS can only investigate on behalf of consumers for actions within that contract and deciding whether the wrongdoing fell within the contract or not wastes time. Finally, the FSCS can only compensate consumers if they have a valid civil claim, rather than pursue redress with the principal.

Because regulatory accountability for ARs lies with the Principal firm, under the current arrangements the FCA is only notified when an AR is recruited but has no right of pre-assessment of suitability as they do with other regulated positions.

Whilst you could argue that the same is true of Certified personnel under SM&CR, because Certification is a legislative requirement, I for one believe that firms are more likely to adhere to regulatory requirements in that respect than they might if there is just rulebook guidance in place.

What changes can we expect? The FCA states in its CP that it wants to see: Increased consumer protection by clarifying Principals’ responsibilities and the FCA’s expectations of them Improved data collection to enable early detection and so prevention, rather than post-event investigation Increased consumer choice by strengthening the regime itself Reduced misconduct, complaints, and redress

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Similarly, HM Treasury’s ‘Call for Evidence’ identifies four areas of likely change: The contract between the Principal and AR, i.e., exemption from ‘general prohibition’ of activity without authorisation (Section 39 of Financial Services and Markets Act, 2000), which allows the AR to trade, could be tightened by placing a maximum size on the AR, restricting what ARs can sell to ‘simple’ products or only allowing ARs to sell products for which the Principal is authorised (and so has the expertise to oversee) Increasing the FCA’s ability to intervene before harm is caused, i.e., by anticipating where future problems might arise, by demanding that Principals provide more regulatory data and extending the FCA’s scope of oversight, e.g., the introduction of ‘gateway permissions’ which would enable the FCA to scrutinise a Principal’s ability to supervise before they recruit ARs Increasing the regulatory requirements placed on ARs, e.g., introducing a Prescribed SM&CR Responsibility specifically for oversight of ARs Increasing the remit of FOS and FSCS to act by enabling them to investigate and compensate for wrongdoing outside of those activities specified in the written contract between the Principal and AR The irony of this is that the market already has an effective regulatory framework to manage this kind of regulatory relationship in the form of the TC rulebook (T&C) which is currently overseen by the FCA, but rarely talked about publicly in any great detail. T&C would provide the structure, standards and ‘early sight’ evidence and KPI’s required for effective oversight of AR’s (if implemented correctly) and so help to reduce, and ultimately prevent, wrongdoing.

Dedicated RegTech in the form of a T&C solution can contain details on licences and authorisations, performance against agreed KPIs, day to day activity observations and assessments as well as CPD and on-going input to maintain and enhance competence. Combined, these elements could provide Principal firms with not only the tools to provide that oversight and input to help maintain competence and capability, but also would provide the evidence and re-assurance that our regulators are obviously looking for in this respect.

As the FCA becomes more ‘data-led’, the data collected by RegTech systems could be made accessible to the FCA to provide them with evidence of effective oversight aligned to positive consumer outcomes. This could provide the FCA with reassurance of effective oversight within firms and enable them to identify the ‘outliers’, (Nikhil Rathi’s term), before they cause significant harm.

Solving a significant problem without reinventing the wheel, could certainly be worthy of merit for this regulatory conundrum. But only time will tell whether the FCA choose to enhance the TC rulebook and reach!

JULIE PARDY, DIRECTOR REGULATION & MARKET ENGAGEMENT, WORKSMART LTD

www.worksmart.co.uk/

So why hasn’t T&C been more widely and more effectively used in the AR/Principal scenario? Well, the majority of successful T&C regimes we see are underpinned by dedicated T&C RegTech and, I suspect, that many firms are not as ‘Tech Enabled’ as you might think.

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THE RACE TO RESHAPE WEALTH MANAGEMENT BUSINESS MODELS IS ON Across the wealth management industry, we’re seeing business models change at an increasing pace. One driver for this development is surely the rapid increases in remote working and virtual advisor/client interactions ushered in by COVID-19. But the factors fuelling the move to new business models go far beyond the pandemic’s immediate effects – and wealth managers should respond now or might face playing catch-up.

So, COVID-19 aside, what drivers are at play? I believe these are several social trends that were already evident pre-pandemic and have intensified in its wake, such as the rising focus on diversity and inclusion and environmental sustainability, coupled with an increasingly multi-generational workforce as younger people join the industry.

A further factor is the democratisation of wealth—as the emphasis on financial education and wellbeing grows— and digital technologies that allow firms to reach and engage new segments of mass-affluent customers at scale. And there are also shifts in the competitive environment as some Financial Services industry players double down on wealth and new FinTech and BigTech players come in seeking market share.

The gap will be widening – as products and services are changing …

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How? By having started to adapt their business models in several key areas. One is through creating a better digital client experience, supported by greater use of data and insights – powered by technologies like analytics and AI – to engage clients more personally. Another is developing innovative products and solutions, often by using ESG and positive social impact investing to attract new and retain existing clients.

… and firms start to transform their back-office But the changes being made by some industry players in business model transformation go further and deeper. As well as digitising and better integrating their client-facing front ends, they’re also rethinking and ‘cloudifying’ their back-office platforms, aiming to make their operations lower-cost and more flexible. And they’re collaborating with an expanding ecosystem of partners – including FinTechs – to provide the products and experiences that their clients want.

It all adds up to a massive retooling of the business at unprecedented speed. And the firms in the vanguard are aiming to deliver it through a new approach to organisational change and transformation: one that involves, on the technology side, moving away from traditional bespoke development methods, and towards a more agile approach focused more on using proven, standardised components to maximise speed and flexibility.

The final business-critical piece of the jigsaw? People, of course. In combination with the workforce changes triggered by COVID-19, which has driven remote interaction between advisors and clients, wealth managers are now reviewing and reshaping their talent strategies to better align with the post COVID era shift towards new hybrid interaction models which are a mix of remote and face to face business models.

Together, these forces mean new and different business models would be needed for firms to tap into the next level of industry growth. And the recent round of first-half financial results for this year indicates that some front-runners might already be pulling away from the pack.

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The future-proof wealth manager takes shape And we’re already starting to see some firms going even further, tackling the next frontier to move towards the wealth manager of the future. For us, this means taking automation and digitisation to new levels to create nextgeneration business models — characterised by highly integrated front ends that enhance client interactions and value still further to drive differentiation and growth.

This drive to build the future also includes gaining new capabilities via a blend of internal innovation and inorganic expansion through M&A, joint ventures and ecosystem partnerships.

All to play for – but no time to lose Today, as the race to transform wealth management business models is on, we’re seeing initial leaders emerge. But it’s all early days – and there’s everything still to play for as the evolution gains further pace and scale.

For the firms now looking to close the gap, the good news is that the initial success of some players has highlighted the need to focus on the key areas that will determine future success and new approaches to transform.

The pace of change is only going to increase in the future – and the longer you wait, the bigger the gaps you’ll have to close.

IAN WOODHOUSE, LEAD WEALTH MANAGEMENT TRANSFORMATION AND THOUGHT LEADER FOR EUROPE AT ACCENTURE.

ian.woodhouse@accenture.com

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MORE THAN JUST A SHORT TERM FOCUS HOW HR CAN CONTRIBUTE TO ESG GOALS OVER THE MEDIUM TO LONG TERM

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“ESG” is the latest buzzword prompting companies to take swift “calls to action”, often with short term initiatives. However, the demand for organisations to engage with ESG, and embed it within their businesses, will be here for the long term, and therefore needs more than just a short term focus. HR departments will become increasingly involved in helping to set, and achieve, the objectives in their organisations’ ESG plan.

So why are businesses in the financial services sector focussing on ESG strategy?

What can HR professionals do to assist their organisations in meeting their ESG goals?

ESG is a top agenda item for the FCA. 2021 saw the FCA appoint its first Director of ESG, Sacha Sadan, and refresh its ESG strategy. With it’s aim to support the financial sector in driving positive change, including the transition to net zero, much of the FCA’s work to date has focused on climate change, particularly so in light of COP26. But the FCA is also committed to building resources and capabilities on ESG beyond climate change, leveraging the extensive work they’ve already done on governance, diversity, culture and purpose. The FCA sees this as essential as listed companies and the financial sector respond to society’s evolving expectations on environmental and social matters.

Environmental

Clients, employees, investors and other stakeholders are increasingly scrutinising organisations’ non-financial performance and value.

The Investment Association publishes guidelines on issues which influence members on whether to support a company’s remuneration policy. Its Principles of Remuneration for 2022, and its letter to members encouraged companies to incorporate ESG metrics into their remuneration policies and explain their intentions to shareholders.

Many firms in the financial sector have to report climate change requirements:

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Regulations, in force 6 April 2022, will require over 1,300 of the largest UK registered companies and financial institutions to disclose climate related financial information. See our previous article.

The FCA’s new mandatory disclosure rules cover a wide range of firms. For the larger asset management firms, new rules in force from 1 January 2022 require publication of an annual report on the firm’s website and disclosure of certain information in a prominent place on their products and portfolios.

The E in ESG stands for Environmental. A mix of public opinion, stakeholder pressure, reporting requirements and employee expectations means environmental targets are a necessity. And so reducing emissions, improving sustainability and encouraging a greener workforce will be issues that businesses in the financial sector will want to consider.

HR can help by encouraging their organisation to discuss ways to improve sustainability. It may seem like small steps, but taking actions such as introducing climate champions, holding tech training sessions to encourage a move away from paper, removing unnecessary waste bins or plastic cups can all inspire colleagues to improve sustainability. HR, with their direct interface with the employees of the business, and with their key role in generating and supporting the values and culture of an organisation, are very well placed to both help in setting, and driving achievement of, targets in the “E” space.

HR might wish to review job descriptions, employment contracts, policies and procedures to enshrine the company’s environmental ethos and improve flexibility to allow for change in line with future need. New benefits could be considered such as company electric car schemes.

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Social

Governance

The S in ESG stands for Social. Social issues extend to a broad range of people issues which sit naturally within HR and which HR teams can help to tackle in practical ways (see box below).

The G in ESG stands for Governance. Workforce engagement is now a corporate governance consideration. The Corporate Governance Code highlights the need for employees to be considered in boardroom decisions, while the Waters Principles hold that a board is responsible for overseeing meaningful engagement with stakeholders, including the workforce. Further, the UK government White Paper “Restoring Trust in Audit and Corporate Governance” continues this theme, providing that the directors’ duty to promote the success of the company includes monitoring the impact of its decisions on employees and to strengthen workforce engagement.

Social is also about how organisations fit within society; how they look to interact with their community of customers and clients, and the wider society within which they operate. HR can be, and often are, the drivers of pro bono programmes and outreach programmes – where employees are encouraged to interact with, and assist, the society around us all. And, of course, it is HR policies which assist, together with compliance, regarding making sure that customers and clients are treated fairly – and that where something goes wrong, it is properly reviewed.

Policies and procedures should be updated to align with ESG objectives. Do job descriptions of senior leaders (senior managers) align with the expectations on governance? Does the responsibility mapping explain where these sit? And do your appraisal / feedback / certification processes embrace and include considerations of this?

Next Steps ADDRESSING THE “S” Key areas to focus on are: Building a positive, diverse and inclusive workplace culture where equal opportunities are safeguarded.

Robust policies which set out the company’s commitment to fostering an inclusive culture which are underpinned by core responsibilities expectations and oversight are particularly important for the financial services sector given that improving culture is a continuing priority for the FCA. Policies should address non-financial misconduct (i.e. behaviours such as sexual misconduct, sexual harassment, other forms of harassment, bullying, favouritism, exclusion and intimidation). This is particularly important now that the way Senior Managers tackle cases of nonfinancial misconduct may be relevant to how the FCA assesses their fitness and propriety.

Ensuring fairness in pay by collecting and analysing pay data. This can be a complex area to navigate but can be managed through transparent and concise messaging on the purpose of the data collection.

Supporting health and safety and employee wellbeing with a focus on workplace conditions, mental health and healthy workplace practices.

Training staff on keeping safe and on how they are expected to behave and making sure staff are aware how to speak up if they see unacceptable behaviour.

Employees should receive regular, up to date training on matters such as health and safety, workplace culture and diversity and inclusion.

For those in organisations who have ESG objectives and a strategy already, HR should be considering how they can assist in meeting those objectives, and in developing the strategy, reflecting on all of the above.

For those without, HR should be “at the table” in terms of considering what should be done and how employees can be harnessed to assist with the strategy which is formulated.

It is only a matter of time before HR have ESG objectives set by the responsible Senior Managers – getting in “early” and helping set the strategy and action plan will assist HR in ensuring that they are involved and utilised in the best ways possible.

HOW WE CAN HELP We can assist with all of the points and themes referred to in this article.

And we have also developed the HR Eco Audit which is designed to assist employers in meeting their climate targets and strengthening their sustainability culture.

A strategy for positive change: our ESG priorities | FCA principles-of-remuneration-2022.pdf (ivis.co.uk) To understand more on what HR can do to improve D&I listen to our webinar: PIMFA - Webinar - Improving diversity and inclusion in the workplace – what is expected from PIMFA members in 2021? https://www.pimfa.co.uk/virtual-events-gallery/?vimeography_ gallery=15&vimeography_video=570334632 UK to enshrine mandatory climate disclosures for largest companies in law GOV.UK (www.gov.uk)

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WRITTEN BY CHRIS HOLME, RUTH BONINO AND ASHLEIGH NELSON, THE EMPLOYMENT TEAM AT CLYDE & CO

https://www.clydeco.com/en

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THE MOVE TO NET ZERO

The path to “net zero” carbon emissions is full of challenges and opportunities.

Companies that proactively engage in a strategy on transitioning to net zero will be more resilient longer term, and more appealing to various stakeholders.

Carbon emissions into the atmosphere from sources including industry, agriculture and people have caused a rise in the temperature of the planet — leading to environmental catastrophes such as floods, droughts, wildfires, decreased food sources and inhospitable climates. Mark Wiedman, BlackRock’s Head of International and Corporate Strategy, estimates that world GDP may decrease by 25% by 2050 if aggressive action is not taken.

Major investors are pushing companies to make explicit plans for their businesses as the global economy moves to eliminate carbon emissions.

Many energy firms have already taken initiatives to reduce their carbon footprints.

A recent ICE webinar with Mark Wiedman discussed progress in the transition to a net zero global economy, and the road ahead for companies and investors.

Activism in Action BlackRock, with $U.S.9.5 trillion in assets under management, is advising firms in which it invests to disclose a plan for how their business model will be compatible with a net zero economy (one where global warming is limited to below 2C, consistent with a global aspiration of net zero greenhouse gas emissions by 2050).

Many firms have already started the transition to a net zero future, with the idea that well-prepared companies will perform better not just for investors, but employees, clients and communities.

Industries such as shipping, consumer products and hydrocarbon energy have understood the coming transition for years. Some companies already subject to carbon cap and trade programs and renewable fuel standards, are using markets to meet obligations and manage risk.

Investor interest in bonds linked to environmental, social and governance (ESG) initiatives has grown exponentially. After attracting $U.S.1 trillion in the first six months of 2021, the global market for such debt has surpassed $U.S.3 trillion, according to the Institute for International Finance.

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INVESTOR INTEREST IN BONDS LINKED TO ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) INITIATIVES HAS GROWN EXPONENTIALLY... THE GLOBAL MARKET FOR SUCH DEBT HAS SURPASSED $U.S.3 TRILLION.

Risks Are Everywhere For companies which do not have a transition strategy, the move to net zero can present risks to reputation, financial health and success as the behavior of consumers, investors and governments focuses on taking steps to mitigate climate change.

But planning can be complicated. Plastics, which are based on hydrocarbons, are everywhere Concrete is also ubiquitous, and releases carbon into the atmosphere when it is created.

Manufacturers of plastics and concrete can’t just shut down, or the consumer goods and construction industries would grind to a halt.

Simply divesting is not always ideal. For example, urging oil and gas companies to divest from fossil fuel projects could result in the sale of those projects to companies that are less receptive to pressure to decarbonize.

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Opportunities Abound

The Need for Standardization

It’s already evident that substantial amounts of capital are allocated toward green infrastructure.

“If you’re looking at infrastructure, look at green infrastructure, where money is pouring in, such as in the U.S., Europe and China. Trillions of dollars in capital will be recommitted into the green economy,” Wiedman said.

Emission and offset disclosures from companies are key to progress towards a net zero economy.

Without clear reporting requirements and standards, companies may have less financial incentive to lower emissions. Data must be verifiable, with requirements for public companies, private firms and firms owned by private equity.

Some companies are benefiting from being viewed as leaders in the push to decarbonize. “Energy producers in Europe that position themselves as renewable producers are seen as winners in the future, as evidenced by stock prices that are already shifting,” Wiedman said.

Wiedman says frameworks like the Sustainability Accounting Standards Board (SASB) and Task Force on Climate-related Financial Disclosures (TCFD) have been recommended as suitable global standards for disclosures for public and private companies. He notes that corporate adoption of SASB and TCFD is accelerating.

Investment opportunities have also materialized in the form of Exchange Traded Funds (ETFs).

BlackRock recently launched two low-carbon transition readiness ETFs, which represent the largest ETF launch in their history at $U.S.1.8 billion.

By contrast, most BlackRock ETF launches are valued at around $U.S.20 million, an indication that interest in proactive companies has been strong, according to Wiedman.

The portfolios are composed of companies that BlackRock judges as leaders in accelerating the transition to net zero — including those that are emitters. Many of these companies have plans to cut their emissions. “We are not going to be entirely without any reliance on carbon at any part of our value chain tomorrow,” Wiedman explained.

“How do we accelerate the shift? You need to move capital to companies who want to make the shift.”

A Transition in Progress The transition toward net zero is being spurred by growing pressure from governments, investors and consumers. The eventual switch to renewable energy and decarbonization will be long and complex and move at a different pace across geographies. Nevertheless, it is in the best interest of companies to have a transition plan in place — or risk the financial and reputational damage that may arise from being left behind.

ANTHONY BELCHER, HEAD OF SUSTAINABLE FINANCE, ICE

https://www.theice.com

LEARN MORE THEICE.COM

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The content of this publication is not to be construed as a recommendation or offer to buy or sell or the solicitation of an offer to buy or sell any security, financial product or instrument, or to participate in any particular trading strategy. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your banker, financial advisor or other relevant professionals (e.g. legal, tax and/or accounting counsel). Nothing contained in this publication is intended to be, nor shall it be construed to be, legal, tax, accounting or investment advice.

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HOW WEALTH MANAGERS ARE RESPONDING TO A UNIQUE SET OF MEGA-TRENDS THAT ARE PUTTING PRESSURE ON FIRM PROFITABILITY AND CLIENT RETENTION The UK Wealth Management sector is facing a unique set of challenges. Key megatrends are driving change in the industry, accelerating consolidation and digital adoption to compete for clients and assets. Many market experts would agree with our view that only those with scale through acquisitions or partnerships are likely to survive.

Consolidation in the Wealth sector has long been predicted, but now it is a reality. Platform consolidation, Private Equity and M&A have driven a dramatic increase in the market share of the top 25 Wealth providers to 85%. COVID-19 has accelerated the trends which are driving this consolidation. Given increased regulatory requirements and low interest rates, it wouldn’t be controversial to say that the writing may be on the wall for firms who cannot scale.

Successful digital transformation in Banking has proven the business case for new technology and that the benefits are huge. At Cashfac we have seen many SIPP providers and Pension Administrators select us to bring scale, cost-efficient compliance and enhanced client self-service to grow their business. Bringing automation to cash operations is often the trigger for back-office transformation and a journey to better profitability.

Our recent research indicates four key megatrends shaping today’s UK wealth industry:

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1. HIGHER COSTS OF COMPLIANCE The surge in the compliance burden started with the 2013 RDR, followed by an increased focus by the FCA on customer suitability. MiFID II and a continuing focus on client money has led many to feel that, without scale, the economic model for some firms is unsustainable. Requirements for operational resilience and senior management accountabilities (the Senior Manager Certification Regime) have added another cost layer.

Whilst some firms have used technology to reduce the cost of compliance, overall the UK Wealth industry has been less successful than Banks in cutting operational costs. The 2020 BCG Wealth Report stated that whereas US banks reduced their cost to income ratios by 8% since the Financial Crisis, that of the UK wealth industry increased by 13% over the same period.

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2. THE FINTECH REVOLUTION IS CHANGING THE INDUSTRY What was once a theory – that Digital Finance would transform the industry – has now become a reality in the Banking sector, if not for Wealth. The Fintech revolution has arrived and is transforming Financial Services. Open Banking is liberating the platform ecosystem and bringing more competition to Wealth Management.

Digital has already brought radical benefits to Financial Services: Accenture Consulting forecasted that up to 70% of Finance Operations activities will be automated by 2025. And we have seen at our clients that manual processing will soon be a distant memory to many firms. New market entrants in Wealth, including platform providers, now offer an enriched digital client experience. They have taken market share by building a modern back-office that supports a mobile front end.

UK banks have now transitioned to the Cloud and Wealth is also on this journey, reducing costs and increasing agility. The deployment of APIs is integrating the front and back office. And Open Banking is bringing new services and diversity to the Wealth market, increasing competition for customer loyalty.

3. CHANGING CUSTOMER EXPECTATIONS Customer expectations have gone digital: they expect fast, real-time digital services delivered through mobile applications rather than simply online. Customers are used to the seamless experience they get from other retail interactions and expect it in Financial Services, often at low cost or even for free. Innovative Fintechs and Challenger Banks have shown that a better digital experience is possible and have raised customer expectations.

Demographic change means younger, more techsavvy clients, whilst the older demographic is now digitally literate.

Recent surveys from McKinsey and Deloitte indicate a clear preference across all client segments for mobile rather than online account management.

Banks have enriched their mobile capability and aligned online and mobile services. The Wealth industry has not progressed very far in building

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these capabilities, and the industry prognosis is that in 3 years most wealth customers will be accessing services through mobile tools. Providers who do not provide them are likely to lose market share to those who do.

RESEARCH BY REFINITIV HIGHLIGHTS THE INITIATIVES THAT FIRMS ARE DELIVERING TO REMAIN COMPETITIVE:

4. SKILLS SHORTAGES

65%

The Financial Services sector is facing a skills shortage that is driving up costs, threatening to slow business growth. Firm operating costs are increasing as they require the necessary skills to support their business.

86%

Recent ICAEW research shows that skills shortages are the number 1 concern of UK Financial Services leaders. Technology is helping some firms to reduce their people dependency and cost base, though managing this indicates that transition is a challenge.

56%

65% see driving operational scale as critical to a competitive business model

96%

86% view the ability to service clients effectively via efficient account opening, onboarding, and cash management as critical to their competitiveness

56% ranked building straight through processing capabilities as very important 96% see the deployment of APIs and an effective technology ecosystem as critical to their competitive success

STRATEGIES THAT FIRMS ARE DEPLOYING IN RESPONSE The broad industry picture of firms having a high-cost base and slow digital adoption hides those that have already started their digital transformation.

In response to these megatrends, market-leading firms have successfully implemented a back-office transformation enabling them to grow their business profitably. This capability allows them to provide a differentiated client service at low cost to the firm.

These firms have followed their peers in Banking in deploying transformational technology to the back office. They have recognised that, to be successful, client facing digital investments can only be leveraged through back-office optimisation.

Our analysis is that most market leaders are either investing in these initiatives themselves to ensure they remain competitive, or they are asking their Platform Provider to reduce the service costs by making this investment themselves.

KEY TAKEAWAYS MEGA-TRENDS

INDUSTRY RESPONSE

1

RISING COSTS OF COMPLIANCE

•

DIGITAL DEPLOYMENT TO REDUCE THE COST OF COMPLIANCE ANFD INCREASE CONTROL

2

THE FIN TECH REVOLUTION

•

AUTOMATION OF MANUAL PROCESSES TO REDUCE PEOPLE DEPENDENCY

3

CHANGING CUSTOMER EXPECTATIONS

•

ENHANCEMENT OF MOBILE CUSTOMER INTERACTIONS TO RETAIN CLIENTS AND THEIR ASSETS

•

DEVELOPMENT OF AUTOMATED OPERATIONAL CASH MANAGEMENT TOOLS TO SUPPORT GROWTH

•

ADOPTION OF “OPEN BANKING” FUNCTIONALITY TO STEM THE TIDE OF FINTECH COMPETITION

4

SKILLS SHORTAGE

JEREMY MARCHANT DIRECTOR OF VALUE PROPOSITIONS AND SOLUTIONS CASHFAC

www.cashfac.com

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MTD FOR VAT CHANGES: WHAT YOU AND YOUR CLIENTS NEED TO KNOW AHEAD OF 1 APRIL 2022

PIMFA.CO.UK

All VAT-registered businesses – regardless of their turnover – must comply with Making Tax Digital (MTD) for VAT rules from 1 April 2022. If you haven’t already done so and you’re VAT-registered, you need to take steps to comply with MTD for VAT requirements.

Ahead of the April deadline, you’ll also need to ensure compliance if you look after your clients’ VAT record keeping and reporting, of course. You might not look after their VAT affairs, but want to ensure that they know about the deadline, so that they can get ready and ensure a smooth transition. This guide is intended to help you achieve all of the above.

HERE’S WHAT WE’LL COVER • • • •

What is MTD and why is it being introduced.

The main changes that MTD for VAT will bring.

How agents can help their clients with MTD for VAT. Where you can find out more about MTD and VAT.

The first phase of Making Tax Digital for VAT began on 1 April 2019, but it applied only to VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000).

WHICH BUSINESSES WILL BE AFFECTED? From 1 April 2022, all VAT-registered businesses, regardless of their turnover, must comply with Making Tax Digital for VAT rules, which includes many sole traders (ie self-employed people), members of ordinary partnerships, landlords and limited companies.

Many with a taxable turnover below the VAT threshold (£85k) register voluntarily, so that they can reclaim VAT on purchases. Up until now, they haven’t been required to comply with MTD requirements for their VAT recordkeeping and reporting. Soon they’ll have to and that will affect some 1.1m VAT-registered businesses with a taxable turnover below the VAT threshold.

According to HMRC, about a quarter of VAT-registered businesses with taxable turnover below the VAT threshold have already voluntarily chosen to join MTD for VAT.

WHAT IS MTD AND WHY IS IT BEING INTRODUCED? Already underway, as you may already know, Making Tax Digital (MTD) is a huge government initiative that seeks to make it easier for people and businesses to “get their tax right” and “stay on top of their tax affairs”, according to HMRC. MTD is being phased in over several years.

NEED TO KNOW! Introduction of Making Tax Digital for Income Tax has been put back until April 2024, with the government citing the pandemic as a key reason.

HMRC believes that using digital record-keeping software and apps can help to prevent businesses from making avoidable tax mistakes, which are estimated to cost the Exchequer almost £10bn a year in lost revenue. MTD is bringing great changes to the way people and businesses keep financial records and report tax data to HMRC, which will apply to VAT, Corporation Tax and Income Tax when MTD is introduced completely.

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Under Making Tax Digital for VAT, businesses must keep digital VAT records and use third-party software to submit their VAT returns to HMRC. That means those that don’t already keep their records digitally will need to start doing so from 1 April 2022.

According to HMRC: “The process of then sending returns to HMRC will become more straightforward, with returns generated and sent directly from the software they are using to keep their records.”

The software businesses choose to use must be capable of receiving information from HMRC digitally via HMRC’s Application Programming Interface (API) platform.

NEED TO KNOW! Those affected by the 1 April 2022 MTD for VAT changes are advised to take steps to become compliant as soon as possible, so they can iron out any issues and get everything up and running smoothly before the April deadline.

HOW AGENTS SHOULD GET READY FOR MTD FOR VAT If you’re an accountant, financial adviser or wealth management consultant with clients affected by the Making Tax Digital for VAT changes from 1 April 2022, here’s how to get ready, if you haven’t already done so.

1 MAKE SURE YOU USE MTD-COMPLIANT SOFTWARE Visit government website GOV.uk to search for software that is Making Tax Digital for VAT compliant.

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2 CREATE AN AGENT SERVICES ACCOUNT Once again, you visit GOV.uk to create an agent services account, which is different to your HMRC online services for agents account. You can use your agent services account to copy across your existing VAT client authorisations from your HMRC online services account. You’ll need to input your Government Gateway user ID.

MORE INFORMATION

3 SIGN UP YOUR VAT CLIENTS FOR MAKING TAX DIGITAL

ABOUT GOSIMPLETAX

Sign up your clients for Making Tax Digital for VAT, after which you’ll be able to manage your client’s details online. To sign up, you’ll need your client’s VAT certificate (you’ll also need to know their business entity type, contact details and business email address). If they’re a sole trader, you’ll also need their National Insurance number. You’ll need other information (eg their UTR) for clients that are limited companies or limited liability or ordinary partnerships.

4 GET ALL NEW CLIENTS TO SIGN UP TO MAKING TAX DIGITAL

If you want to act for a new client, ones you haven’t copied across in step 3, they must sign up to Making Tax Digital so they can authorise you (you can’t do this for them). First you must sign into your agent services account then select “Ask a client to authorise you”. You then create an authorisation request, which appears as a link that you can send to your prospective new client. They must have signed up to MTD for VAT and use the link to reply to your request before it expires.

Government website GOV.uk features a wealth of information for both agents and businesses on Making Tax Digital for VAT. You can watch videos and register for free webinars to learn more about Making Income Tax and VAT, whether you’re an agent or business.

GoSimpleVAT is a bridging software product

MORE INFORMATION launched

by GoSimpleTax, designed to assist businesses through MTD for VAT.

Recognised by HMRC and guaranteed to lead you to compliance. You can take advantage of their free 14-day trial to see just how simple VAT filing through bridging software can be.

GoSimpleTax are a PIMFA Plus Partner and a 15% discount is available for PIMFA members ARTICLE BY GOSIMPLETAX

www.gosimpletax.com

5 AUTHORISE YOUR SOFTWARE You can only send VAT returns digitally if you’ve authorised your software. If you don’t know how to authorise your software, contact your software supplier for guidance.

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OPERATIONAL RESILIENCE: IS OUTSOURCING ON YOUR RADAR? Throughout the discussions and consultation, there has been a clear and recurring message to firms. To build a business that is operationally resilient, you must take an holistic view and consider any external impacts upon your business services.

An operationally resilient firm must have a comprehensive understanding and mapping of the resources that support their business services. This includes those outsourced and third party services over which the firm may not have direct control.

This requires a move away from traditional analysis of process and control failures. Instead of risk management in silos, firms must take an external review of potential threats and how these could impact broader stakeholders. Firms need to consider their clients, industry players and regulators as well as any crossborder threats and impacts.

REGULATORS’ APPROACHES The PRA outlined its approach to outsourcing and third party risk management in PS7/21. It builds upon existing requirements set out in the PRA Rulebook as well as Guidelines issued by European bodies including the European Banking Authority (EBA) and the European Insurance European Insurance and Occupational Pensions Authority (EIOPA). PRA expects firms to assess the materiality and risks of all third party arrangements using all relevant criteria irrespective of whether such arrangements fall within the definition of outsourcing.

Meanwhile, the FCA reminded firms of their current obligations under Principles 3 and 11, as well as MiFID II, SYSC 8 and 13. Firms must manage their affairs in a prudent manner and avoid undue operational risk. FCA

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repeated PRA’s guidance that firms should follow the EBA Guidelines The FCA’s cross-sector survey from 2017-18 provides some context for consideration.

SURVEY FINDINGS 2017/18 IT FAILURE IN ONE IMPORTANT SUPPLIER ACCOUNTED FOR 15% OF REPORTED INCIDENTS TO THE FCA IT CHANGES CAUSED 20% OF REPORTED OPERATIONAL INCIDENTS 50% OF FIRMS DID NOT HAVE A COMPREHENSIVE LIST OF THIRD PARTIES WITH WHOM THEY DO BUSINESS AND SHARE SYSTEMS AND DATA 26% OF FIRMS DID NOT HAVE A BOARD APPROVED INFORMATION SECURITY STRATEGY ONLY 56% OF FIRMS COULD MEASURE THE EFFECTIVENESS OF THEIR INFORMATION ASSET CONTROLS Source: CP19/32

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DEMONSTRATE COMPLIANCE WITH RULES

THE CROSS-SECTOR SURVEY IDENTIFIED A NUMBER OF WEAKNESSES:

1

GOVERNANCE AND RISK MANAGEMENT: CONCENTRATION RISK, where the

ASSESS THIRD PARTY ARRANGEMENTS

sector is reliant on a small number of key suppliers, which could prove difficult to substitute.

2

TECHNOLOGY advancements are

3

LACK OF OVERSIGHT OF SUPPLIERS’ RELATIONSHIPS,

4

The PRA has indicated that it does not expect firms to directly monitor fourth parties in all circumstances.

However, when entering into a material outsourcing agreement, firms should consider the potential impact of large, complex sub-outsourcing chains on their operational resilience. It’s wise to keep a register of all outsourcing arrangements.

beneficial, but develop so quickly that it may be difficult to maintain an understanding of the risks posed

APPLY OBLIGATIONS TO THIRD PARTIES

GROUP DEPENDENCIES:

where firms need to understand the arrangements in place as well as any related subcontracting to third parties and the creation of long and complex chains.

APPLY OBLIGATIONS THROUGH SUPPLY CHAIN

LACK OF GOVERNANCE where firms fail to understand risks and monitoring the effectiveness of controls.

•

WHAT SHOULD FIRMS DO?

•

Firms must identify their third-party relationships.

The SS2/21 sets out that firms should assess the materiality and risks of all third-party arrangements using all relevant criteria.

•

Firms need to identify (a) third-party relationships and (b) those deemed to be material outsourcing arrangements and complete the following steps:

Final policies and statements have repeated the message that regulated firms retain full responsibility and accountability for discharging all their regulatory responsibilities. Firms cannot delegate any part of this responsibility to a third party. This oversight and accountability is aligned with the Senior Managers & Certification Regime. Boards must understand the risks posed from third party arrangements and consider the impact upon their important business services.

•

Demonstrate that they are following the relevant rules and guidance within their firms Assess any third-party arrangements and identify those that meet the definition of outsourcing Apply regulatory obligations appropriate to the risk management of third-party relationships (outsourced or not) Apply the rules and guidance through the extended supply chain

Where a third party uses sub-contractors, regulated firms are expected to ensure that the third party has the ability and capacity on an ongoing basis to appropriately oversee any material sub-outsourcing in line with the firm’s outsourcing policy. This includes establishing that the service provider has in place robust testing, monitoring and control over its sub-outsourcing.

Another important aspect of governance relates to larger organisations which may have intra-group outsourcing.

In some cases this might include cross-border outsourcing to parent companies outside the UK. These relationships are subject to the same requirements as outsourcing to an external third party and are not to be treated as being inherently less risky. Firms may consider the extent to which they can exert influence and the control they have over their third parties, where those parties are members of the same group.

Given the above, firms cannot fail to see the potential impacts of outsourcing and other third party service provision upon their operational resilience frameworks.

AUTHOR: PRISCILLA GAUDOIN, HEAD OF CLIENT REGULATION, AXIOM HQ.

https://www.axiomhq.com/operationalresilience

Collation and analysis of such data should enable a firm to determine that third parties will not limit a firm’s ability to remain within its impact tolerance for an Important Business Service.

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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)

@PIMFA_UK

www.pimfa.co.uk

https://www.linkedin. com/company/pimfa/

Journal design by Cicero/AMO cicero-group.com For more information about design please contact: Megan Harley, Digital Creative Director, Cicero/AMO (megan.harley@cicero-group.com)

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BUILDING PERSONAL FINANCIAL FUTURES

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