Wma journal 2016 28 06 16

WMA JOURNAL Spring/Summer 2016

Looking into the

FUTURE

Also in this issue:

Brexit and the industry Loyalty in wealth management and private banking Targeting the next generation of clients Treating clients fairly A focus on women in wealth

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SPRING / SUMMER 2016

Contents 04 05 07 16 18

Industry Stats

Driving Loyalty In Wealth Management & Private Banking

Women In Wealth

Undervalued?

All You Need To Know About The Risks Of Underinsurance

Targeting The Next Generation Of Clients

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Are You Treating Vulnerable Customers Fairly?

Brexit And The WMA Community

Strategic Beta And Fixed Income

Hacker Girl: The Case Of The Naive Banker

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NDUSTRY STATS The broad make-up of share ownership remained the same at the end of 2014 as it was in 2012, with rest of the world investors holding significantly more shares (in terms of value) than any other sector Rest of the world ownership stood at an estimated 54% of the value of the UK stock market at the end of 2014. This was up from 31% in 1998 but unchanged from the 2012 estimate UK individuals owned an estimated 12% of quoted UK shares by value at the end of 2014, an increase from the historic low of 10% in 2010 and 2012 Unit trusts held an estimated 9% by value at the end of 2014, slightly down from the 2012 level but still much higher than in 1998, when they only accounted for 2% of share ownership Other financial institutions held an estimated 7% by value at the end of 2014, similar to 2012 but lower than the estimated 12% they held in 2010 Insurance companies held an estimated 6% and pension funds an estimated 3% by value at the end of 2014, continuing the downward trends in these sectors seen in recent years

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The majority of shares by value are held in multiple-ownership pooled accounts, where the beneficial owner is not held centrally and must be established by means of a Companies Act 2006 Section 793 request. As in 2012, these accounted for over half (59%) of the total holdings by value at the end of 2014. Multiple ownership pooled accounts have been allocated to sectors using further analysis of share registers This statistical bulletin provides estimates of holdings of ordinary shares in UK domiciled, quoted companies by sector of beneficial ownership, and also incorporates revisions to the 2012 data originally published in September 2013 The beneficial owner is the underlying owner; the person or body who receives the benefits of holding the shares, for example income through dividends (see Annex A for details). Companies included are those which are listed on the London Stock Exchange and are domiciled in the United Kingdom; that is, their country of incorporation is the UK. At the end of 2014, shares in quoted UK domiciled companies were valued at a total of ÂŁ1.7 trillion Source: https://www.ons.gov.uk/

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DRIVING LOYALTY IN WEALTH MANAGEMENT AND PRIVATE BANKING

By David Barks, Associate Director, Wealth-X Custom Research

Private Banks and Wealth Managers often ask us how they can retain their clients, deepen the relationship, extend share of wallet, widen the products and services clients use, and grow their business through recommendation.

In order to inform these we first of all seek to understand how loyal their clients are. Over the past 12 years, Wealth-X Custom Research has interviewed thousands of private banking and wealth management clients all around the world about their loyalty. From this work, we have developed an understanding of what drives client loyalty, getting to the true health of their proposition and the improvements needed.

Consistently, we’ve uncovered three areas key to driving loyalty: • • •

Primary personal relationship Delivering results Brand image and reputation

Primary personal relationship This is often the area that attracts the most attention, and rightly so. We find that the relationship between the primary contact and the client can be a huge driver, or drag, on loyalty. In particular, three aspects of the relationships are important.

1. Client focus Do they feel their contact knows and understands them, personally and financially?

Do they believe that the conversations speak to them as individuals?

Do they trust their contact to put them first?

2. Contact strategy Are you contacting them on their terms?

Are you talking about the things that are important to them?

Do you understand, and meet, their expectations with the frequency and means of contact?

Do you know how expectations are changing with new technology?

3. Relationship changes How well did this process go for clients?

Is their new contact informed and aware and able to understand them? (This is a key test of the brand’s capacity to serve them. They want to know if the relationship can be replicated with another contact.)

Unfortunately, doing this particularly well can often create loyalty to the individual rather than the organisation. But the next two areas can help create more loyalty to the organisation.

Delivering results

Maybe surprisingly, and for investments especially, providers can sometimes be afraid to ask clients feedback on this area.

However, client perceptions of how well you’re delivering against expectations is a key factor in measuring their loyalty.

Four aspects of this are consistently found to influence loyalty: 1. Achieving results in agreed timeframes a. Are you doing what you say you’ll do? (E.g. clearing checks,

making payments, beating investment benchmarks) b. Are the products and services meeting their aims (E.g. investment objectives)?

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2. Expectations management a. Do they understand what is happening, when and why?

3. Information clarity and accessibility a. Are you communicating outcomes by the means they want (e.g. online, by posted report), when they want? b. Do they have to ask questions to understand what is happening? c. Is the information up to date and relevant?

4. Effort a. How much effort was required from them to get things done? b. How simple and easy are the processes they go through? c. Is it more difficult working with you than expected?

1. Proposition uniqueness a. Do clients feel they can access the same or similar products or services elsewhere? This can be seen as the ‘unique selling points’ of the offer. But they can sometimes only be developed through experience, for example Chief Investment Officer communications.

2.Brand consistency a. Do clients expect, or experience, a consistent branding, way of working and communicating across channels, products and services? b. Do clients see you as excellent in a narrow field and weak elsewhere?

3. Feeling valued a. Are clients delighted in their experiences? b. Do they feel rewarded? Are they rewarded? c. Is there an ethos of flexibility; going above and beyond?

Across all our client loyalty work, we look to answer all of these questions and are able to uncover the weaknesses and necessary improvements. And whilst consistently influential, how the different factors impact the loyalty of different client types varies according to their profile.

For more information, please contact: David Barks (dbarks@wealthx.com) or Michael Byrne (mbyrne@wealthx.com).

Brand image and reputation When serving the wealthy, brand image and reputation are often seen purely as tools for acquisition. But brands can create stickiness too. A brand can even overcome failures in the relationship or when delivering results, allowing forgiveness and time to put things right. Within the client’s perception of the brand, several aspects are worth highlighting:

SUMMARY

SUMMARY BOX • Loyalty drives share of wallet, developing wider and deeper relationships, and growth through advocacy • Three aspects consistently influence loyalty: primary personal relationship, delivering results, brand image and reputation • Understanding the influence each aspect, and their key elements, have on your clients and where changes need to be made are vital to improving business outcomes

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Women in wealth Experiences as a woman in the wealth management industry RBS recently hosted the WMA’s inaugural Women in Wealth event, a partnership which we hope will help to gather women from across the industry for peer-to-peer networking and inspiration.

Improved gender balances across all levels of RBS is a key commitment of ours – by 2020 a third of all of RBS’s Senior Management roles will be held by women, and by 2030 the intent is to have 50/50 gender balance across the bank. We know that being an inclusive organisation is good for our people and for our business and this doesn’t just apply to us – this is the case across all financial services businesses, including the Wealth Management Sector.

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Experience and

Comments

There is a multitude of research which proves that there is a clear business case for having a more diverse workforce, and in particular more women at the top. Better gender balance on boards equates to better share price and financial performance. From 2005 to 2014, boards with a higher-than-average percentage of women1 outperformed by 36% those that had a fewer-than-average percentage of women. Companies with women board members also outperform those without women in return on equity, net income growth, and price-to-book value2 There are a number of reasons for this but the key to clientfocused organisations is to have a more gender balanced workforce, which will only lead to a more diverse, wider customer base. According to the CFA Institute, the global income of women will grow from $13 trillion to $18 trillion in the next 5 years – that is more than the GDP growth of China & India combined during the same period. By 2028 women will control 75% of the discretionary spending around the world.3 And if this is the case unless you have a diverse, culturally aware organisation, it is unlikely that Wealth Managers will be able to capitalise on this. Recent research from EY on women investors in wealth management suggests that women need to be served differently by their financial advisors – they are different to men in that they spend longer educating themselves before making a decision and tend to base these decisions on relationships, brand affinity & trust – they are not as transactional in their decision-making and therefore tend to be more loyal.4

Nikki Short Associate Director, RBS

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Nikki Short has spent the last 8 years in Client Relationship Management at RBS, working with a wide range of the banks clients, from Business Start-Ups to Large Corporates. In her current role, Nikki currently relationship manages a small portfolio of Large Corporate clients in the Wealth Management Sector.

Passionate about encouraging her colleagues

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to aim higher, she also acts as Global Vice-Chair of RBS Focused Women’s Network, a voluntary network whose aim is to attract, retain and develop female talent within the bank. Outside of work Nikki is a keen to ensure young females have role models to aspire to, and as a result takes part in the Springboard Mentor programme, mentoring university undergraduates.

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Looking into the

F U T UR E

So what can be done? At RBS it is key for us to build the female pipeline of talent to ensure we reach our 2020 target – some of the ways we are doing this is by profiling female role models, equipping talented female employees across all levels of the bank with the leadership skills required to move into more senior positions, and providing improved networking, mentoring and sponsorship frameworks to give females the support necessary to succeed in the organisation. We have a strong employee- led female network with over 7500 members – RBS Focused Women - that provides additional networking, personal development and peer support for our female employees.

The founder of RBS Focused Women – Heather Melville – Director of Strategic Partnerships and Head of Inclusion Initiatives in the Commercial & Private Banking Division says

Getting the opportunities to advance and develop shouldn’t be exclusive to those that can brave it alone.

During my time at RBS I’ve experienced first-hand the incredible power that good mentors and a strong network can have. That is why we are working with other industry bodies like the WMA to promote gender diversity across all financial services firms.

For more information please contact Nikki Short - Associate Director, Wealth Managers & Brokers Sector, RBS. Email: Nicola.short@rbs.co.uk

1. Research Institute, September 2014; Catalyst censuses (Fortune 500 and FTSE 250), 2014 2. Ibid.

3. Virginie Maisonneuve, head of equities at PIMCO, as quoted in “What Women Want Is Good Financial Advice.”

4. Harnessing the Power of Women Investors in Wealth Management, EY Report, 2016 http://www.ey.com/Publication/vwLUAssets/ey-women-fast-forward-thought-leadership/$FILE/ ey-women-fast-forward-thought-leadership.pd

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Experiences as a woman in the wealth management industry As Head of Coutts International and Private Office and a member of the Private Banking Executive Committee I am in a privileged position to influence the Diversity & Inclusion agenda in our business.

does something practical. These are the actions that have helped me in my own career journey.

Linear career progression in one company is often challenging, so there is need for lateral thinking.

The sector is so broad that it can provide anyone with a varied and stimulating career, but it requires personal ownership and the willingness to embrace change.

Diversity is about choice which is generated by open mindedness.

Recently at the Private Asset Management Awards I was struck by the visibility of a generation of successful women who now hold positions of responsibility and influence in the sector. More heartening still was the presence of the next generation of female talent. This is in stark contrast to I fell into Wealth Management after university. It was not my first the same room a few years ago. choice but I soon fell in love with Progress is being made. Companies it. Graduate training with Lloyds are embracing flexible working, Private Banking was a smorgasbord modernising policies, and executing of learning the ropes of this programmes such as “Returning profession; eventually looking after after Children”. The commercial clients in Mayfair. I then ventured case for diversity is a regular part to Drummonds to help establish of business strategy and language. RBS Private Banking where we partnered with Newton Investment However there is more to do.

When considering the various Management. This triggered a objectives, for example RBS to desire to join Schroders as a junior have 30% female representation at Private Client Portfolio Manager, executive and senior management where I spent many enjoyable level by 2020, I prefer to think about years building a client book and what is achievable when each of us managing portfolios.

Camilla Stowell Managing Director Coutts Private Office

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Camilla joined Coutts Private Office in 2007 with a mandate to manage a portfolio of Ultra High Net Worth clients. She has built an impressive 20 years’ plus experience in the wealth management industry, previously in client management roles at Lloyds Private Banking, Drummonds, and Schroders Private Bank.

In May 2015 she was appointed Managing Director of Coutts International and Coutts Private Office,

continuing to work closely with a portfolio of clients, whilst overseeing the management of the businesses, alongside strategic and propositional developments as a member of the Private Banking Executive Committee. Camilla won Private Banker International “Outstanding Young Private Banker” 2012. She has a BA Hons Philosophy & Politics Durham University and the Securities Institute Diploma.

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These were formative years and I brought all of these experiences together at a client role in the Private Office (Ultra High Net Worth business) at Coutts - a broad proposition and strong brand. Nine years later, I am lucky enough to have a general management role whilst retaining a portfolio of clients.

leaders want their teams to be successful as it reflects well on all involved – share your ambitions and aspirations. You may not always get what you want immediately, but you will find out where you stand and what the next steps could be.

My current role was not something on my radar. However as I went through the process of testing my appetite and capability, I improved my understanding of the opportunity and then played back my desire for it to the relevant parties. Even if I had not been successful, I would have still learned something valuable about what was possible in the future.

Career progression is less about the badge but more about building capability.

I have taken the opportunity to invest in myself (both privately and corporately) from professional qualifications through to Executive Coaching. Every role change involved an element of risk and commitment which inevitably impacts the balance of In our sector, we often make the personal and business life. mistake of promoting great client facing individuals into general Naturally, I have discovered that management roles. The skills the better I can articulate what do not automatically translate I want, network with people to across. We need to continue build on my knowledge, the to coach people on how to more I can visualise and work line manage well. Personally it towards the next challenge. I has worked best where I have identify a variety of role models reached out, shown a little bit of who inspire and demonstrate vulnerability and asked for help. what good looks like and I then This gives them an insight into try and learn from them. Mentors what motivates me, and is a good continue to play a key part. A indicator back as to how much recent development area was they can help me be better. In my public speaking, so I spent time early years, one of my manager’s with colleagues who are great spent time working out what I at it, invested in some coaching, really wanted and held the mirror pushed myself to do more of it, up to my behaviours to show me and it is now part of my “business that without change I would not as usual” tool kit. get there. It was a difficult and uncomfortable conversation but Never assume that people know one of the most effective. what you want. The majority of

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Looking into the

FUTURE All of this requires the ability to operate flexibly, communicate and manage teams and businesses well.

I don’t believe in direct positive discrimination to hit targets and quotas, but I do believe in indirect positive discrimination such as, using diversity “yes check� methods to ensure sufficient candidate choice when hiring, mentoring and sponsoring, and contributing to targeted training such as Women in Leadership courses.

The landscape of wealth management is changing.

Women and the millennial generation are becoming more prominent investment decisions makers. There is the continued rise of the female entrepreneur and we are soon to witness one of the largest intergenerational transfers of wealth in the developed world.

This is all about incremental gains, and if we can help each Fintech will change structures other be the best we can be, and delivery frameworks then this creates momentum but ultimately there will to ensure we attract more always need an element of women into the industry the human factor. MIFID who stay and progress. It is II will continue to change practical action that people the commercial dynamics gave me that I now make sure of Wealth Management I give others. activities. As we grapple with the increasing cost burdens of compliance and regulation, and margin pressures it is all about productivity.

Wealth is an emotive topic and we need diversity of employees to look after clients directly and also work in the central functions so we have diversity of thought as to how we build, deliver and risk manage propositions successfully.

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PROMOTING A CULTURE OF INVESTMENT Wednesday 9th November 2016 Grange Tower Bridge, London Keynote Speaker: Sir Ranulph Fiennes Bt OBE Explorer

6 reasons to attend

Topics include

• Over 400 senior industry professionals in attendance • Over 10 hours of networking opportunities • Unparalleled keynote addresses • Provocative panel discussions with leading industry figures • 6 hours of CPD • Opportunities to engage with thoughtleaders that will tackle key issues

• Developments in 2016: Europe in Context • UK Regulation Update • Opportunities for the UK Retail Investor • Cyber Risk – The Government’s Perspective • Managing Distribution Channels • Advisor Technology: What Are You? • Economic Review and Outlook

Cost: Members: Non-Members:

£299 + VAT £599 + VAT

To book www.thewma.co.uk/events

INSURANCE MADE TO MEASURE

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HOW TO RECOGNISE A TAX AVOIDANCE SCHEME There are many legitimate ways to reduce your tax bill. For example, you can save money in a tax-free ISA, make donations to charity through Gift Aid, claim capital allowances on assets used in your business or pay into a pension scheme.

However, there is a big difference between using tax reliefs and allowances in the way in which they are intended and trying to bend the rules to avoid tax.

SO, HOW CAN YOU TELL IF YOU’RE BEING OFFERED A TAX AVOIDENCE SCHEME? Here are some warning signs you can look for which should help you decide whether you’re receiving good tax advice about how to plan your affairs or are being sold an avoidance scheme: 1. If it sounds too good to be true, it probably is. Some schemes promise to get rid of your tax liability for little or no real cost, and without you having to do much more than pay the promoter and sign some papers.

2. The benefits are out of proportion to any real economic activity, expense or investment risk.

3. The scheme involves arrangements which seem very complex given what you want to do.

4. The scheme involves artificial arrangements or money going around in a circle back to where it started.

5. The scheme promoter either provides the money to make the scheme work or arranges for it to be made available by someone else.

6. Offshore companies or trusts are involved for no sound commercial reason, or a tax haven or banking secrecy country is involved.

7. The scheme contains exit arrangements designed to sidestep tax consequences.

8. There are secrecy or confidentiality agreements, upfront fees are payable or the arrangement is on a no-win/no-fee basis.

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YOU MAY ALSO BE TOLD THAT:

The scheme is HMRC-approved because it has been allocated a Scheme Reference Number (SRN) by HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS) regime.

This is simply not true. HMRC never approves schemes, it issues these numbers when a scheme has signs of being designed to avoid tax. If a promoter is claiming that their scheme doesn’t need to be disclosed then HMRC are probably challenging that.

It is only tax planning, or that avoidance is legal.

If the scheme doesn’t work you’ll have made an incorrect tax return which is not in accordance with the law. You are legally obliged to pay the tax due and you may suffer penalties.

It’s OK because it was vetted by a lawyer.

This is often not true. Promoters will say they have legal advice which states that the scheme works. But have you read and understood that advice? Are you certain that the legal advice is based on the arrangements the promoter is advising you to implement?

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UNDERVALUED?

ALL YOU NEED TO KNOW ABOUT THE RISKS OF UNDERINSURANCE Underinsurance is a subject which is becoming a growing concern for many Financial Institutions as ensuring that the right sums insured are covered is often complex and the values in question can change quickly.

The widespread nature of underinsurance in the property market was underlined by research carried out recently by the Building Cost Information Service, which is part of the Royal Institution of Chartered Surveyors. It found that 80% of commercial properties are underinsured.

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In similar work, the Chartered Institute of Loss Adjusters found that 40% of business interruption policies are underinsured with the average shortfall being 45%.

When it comes to business interruption, for example, the definition of gross profit is not consistent between insurers, accountants and Financial Institutions, and this can immediately lead to problems. Accountants will generally strip out things like staff and utility costs whereas insurers will not. Businesses also tend to underestimate how long it will take to get back on their feet and the standard business interruption indemnity period of 12 months is simply not enough.

Having a comprehensive insurance programme in place is only the first step, this needs to go hand in hand with continually assessing sums insured and ensuring accurate levels of cover are in place.

This will help the business recover faster and remain in a strong commercial position following a major claim.

Some businesses are underinsured by more than 50% and on average, across all sectors the level of under-insurance is 20%.

WHAT IS UNDERINSURANCE? In summary, underinsurance occurs when either the sums insured on a policy do not represent the current value of the items at risk or where limits within a policy are inadequate for a client’s needs. It is important to remember that any sum insured should represent the full extent of the risk. For example, the buildings sum insured should not only cover the building materials and labour costs required to rebuild the property but it also needs to cover any debris removal costs, architects’ fees, local authority fees and so on.

Having a comprehensive insurance programme in place is only the first step, this needs to go hand in hand with continually assessing sums insured and ensuring accurate levels of cover are in place.

Businesses also need to fully understand the type of insurance in place. Reinstatement cover will replace old for new while indemnity cover will pay out the market value of the property at the time of the loss. As such, the difference between what a business thinks it is covered for and what it is actually covered for, can be significant.

Unfortunately, if all these factors are not taken into consideration, in the event of a claim, being underinsured will result in a financial loss to the client as insurers will apply an average to any losses, but what does this actually mean?

Average works by reducing the amount of the claim by the same amount of underinsurance, for example: A client’s building is insured for £500,000 and a fire occurs causing £200,000 worth of damage. If the correct value of the building is actually £750,000 insurers will consider that the client has only insured the building for two-thirds of the risk and as such will reduce the claim payment by a third. Therefore the initial £200,000 claim would be reduced by £66,660 and settled at £133,340 LESS any policy excess that would then be applied; this illustrates the financial loss that will be incurred by the client.

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HOW TO AVOID UNDERINSURANCE There are some key areas where underinsurance can be especially prevalent. These include, assessing the correct level of business interruption cover (both in terms of calculating Gross Profit for Insurance purposes as well as identifying the correct period of recovery), maintaining an up-to-date register of all machinery, plant and contents and understanding the replacement value of these items and, finally, confusion around the market value and rebuild costs for commercial property.

It is important that a business works closely with their insurance brokers to continually assess sums insured and policy limits to avoid the potential of being underinsured.

It is important that a business works closely with their insurance brokers to continually assess sums insured and policy limits to avoid the potential of being underinsured.

At Lark, we regularly undertake these assessments and also introduce our clients to professional valuation companies who can provide further assistance.

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Please do not hesitate to contact your Lark Account Handler for more information. martin.camp@larkinsurance.co.uk 020 7543 2806 WMA Journal

TARGETING THE NEXT GENERATION OF CLIENTS

BY Compeer Limted Many Wealth Managers have an average client age of 60+, with services to match their needs. However, are these services sufficient to meet the needs of the next generation, or will the inherited wealth be transferred to a competitor? Do wealth management firms have a coherent strategy for attracting and retaining the younger age group? Does it require more than adding a few apps to the current service proposition?

These were just a sample of questions that we at ComPeer sought to answer when interviewing 1,001 end investors in November last year.

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Are you currently using the same wealth management / advisory / execution only service provider as your parents?

My parents have never used a wealth manager

25%

Yes

30%

No

45%

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Key differences between generations •

•

•

A digital divide exists between the two age groups surveyed with the next generation (aged 18-49) far more demanding regarding the provision of mobile applications. One in four already use a mobile application to view their investment portfolio, with half of the remainder wanting their wealth manager to provide one.

There is no demand for social media interactions with the 50+ group. However, the next generation shows more openness to this communication method with 28% willing to communicate with their wealth manager via social media (as opposed to 4% for the 50+ group).

There are many factors that determine what clients look at when choosing a Wealth Manager and what they value most in the client-manager relationship.

There is a strong correlation between the two age groups with the top three criteria being: • • •

Investment performance Brand and reputation of the Wealth Manager Level of fees

Investment performance and fees have always been at the top of the table in recent years. However, this year saw a surge in the rating of brand and reputation as wealth clients ever more want to deal with firms that they believe they can trust.

So what action items should wealth managers take to The younger investors are actively looking win over the next generation? for advisory services on topics such as tax and pension planning as part of the wealth Investment performance is important and should be a management package. given. Clients are highly likely to leave without sufficiently robust performance over time.

• Satisfaction levels for the next generation Downward pressures on fees will not stop. Differentiation, are far lower with more than one in three trust and communication are important to protect margin wanting significant improvements in client and mandates. communication and education, staff stability, bespoke offerings and greater access to There is a highly notable communication and marketing relationship managers and advisers. gap between wealth managers and the children of their clients, which represents a significant and lost opportunity.

But there are important similarities Less than 25% of the 18-49 group that do not invest with Despite these differences both groups are clear the same wealth managers as their parents have been they want face to face manager contact. Almost two contacted by the wealth management firm. In a sector thirds of both investor groups chose face to face that relies heavily on word of mouth to gain business, the meetings as their preferred method of engagement opportunity cost from failing to communicate with the with the majority wanting these meetings at next generation is high. least on a six monthly basis. The next generation therefore does not want to deal exclusively through To view the full results go to: http://www.compeer.co.uk/ digital channels and value remains in the traditional affluent-and-high-net-worth-investor-research portfolio manager.

•

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ARE YOU TREATING VULNERABLE CUSTOMERS FAIRLY?

By Tim Wilson, Sales Manager Banking & Financial Services, HITEC

Greeting and meeting customers might not be considered an important role within an organisation, but frontline staff who can recognise the signs of vulnerability and have the right approach to explaining complex information, are worth their weight in gold.

According to recent FCA research, one in seven UK adults have the literacy skills of a child aged 11 or below, and 7.1m Britons have never used the Internet. More than 800,000 people are living with dementia, and the number of people aged over 85 years is expected to double in the next twenty years. Add to these statistics, the everyday trauma Following the financial crisis, stability and ‘good of bereavement, divorce, money worries and job outcomes for customers’ now ranks as highly loss, and it is little wonder the Regulator places as profit. Organisations that can demonstrate the protection of Vulnerable Customers at the top employees are placing the interests of customers at of its agenda. It says it will: “step in earlier and act the heart of decision making and being rewarded faster, when it identifies problems that risk harming for ‘doing the right thing’, enjoy a clear advantage customers or the integrity of the market.” But is this and lessen reputational and financial risk. message getting through?

At a time when multi-million-pound regulatory fines were issued by the Financial Conduct Authority (FCA) for manipulation of benchmarks, PPI, data protection and Treating Customers Fairly failures, the need to implement effective systems and controls has never been greater.

A recent FCA investigation into the treatment of Vulnerable Customers, found that inadequate systems around data protection and affordability, as well as inflexible products and services, has led to many customers across several industries not receiving fair treatment.

In this new regulatory landscape, the FCA wants to make certain that boards and senior management review their Vulnerable Customer approach to ensure they are behaving in a way that is best for the consumer.

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The FCA identified four key areas where companies Risk Management Software is another crucial tool, are failing to deal with vulnerable customers helping organisations to identify, monitor and manage Vulnerable Customer risk and mitigate the appropriately, including: likelihood of a negative event taking place in the • A lack of policy and procedures in place in first place. respect of customer vulnerability.

The days of using manual processes to store data • A failure in respect of internal systems to is long gone. Now considered time-consuming, accurately record issues of vulnerability and to error prone, inefficient and criticised by auditors, communicate this internally. organisations are turning to dedicated risk management solutions to help identify and • Inflexible products and services. proactively address Vulnerable Customer risk.

•

A lack of implementation of policies or an Risk Management software protects against losses inconsistent approach. that occur from inadequate or failed internal processes, people, systems and external events.

In this new regulatory climate, it is crucial that Senior Managers ensure staff are motivated to engage But in a frenetic 24/7 corporate working appropriately with Vulnerable Customers and that environment, how can organisations ensure that they receive the training and support necessary to employees are fully aware of their Vulnerable provide a sustained high quality service.

Customer responsibilities and have instant access to the latest version of policies, procedures and Keeping customer documentation safe and training? accessible is crucial to proving that customers have been treated fairly in the event of a dispute or audit. One way to demonstrate ‘best practice’ is to implement a Policy Management solution that But with customer information contained within a ensures the right Vulnerable Customers policies colossal range of silos (customer applications, emails, and procedures get to the right people, that they SMS, excel spreadsheets, paper documents etc.), become accountable by signing up to them and how can firms’ streamline the complex process of that the entire process is recorded and auditable. record keeping and evidence they are putting their Industry standard software should provide a customers first? detailed audit trail, reducing the risk of regulatory fines and reputational damage.

Enterprise Content Management (ECM) software helps to prove customers are treated fairly by In this brave new world of regulation and compliance, capturing, indexing and archiving all documentation when good customer outcomes are at the heart of - regardless of source - via a single, secure, central business, the need for robust software solutions that repository to provide a single view of the customer. help organisations achieve a culture of integrity, fair practice, and put vulnerable customers first, is not Corporate information is retained in accordance just ‘a nice to have’ - it is an essential requirement. with legal and regulatory guidelines, providing a clear vulnerable customer profile for compliance Visit Hitec’s website to read the full article, including purposes. vital steps to protecting customers. http://www.hiteclabs.com/campaigns/treatingvulnerable-customers-fairly/

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BREXIT

How will it affect you?

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BREXIT and the WMA community As the nation has now voted to leave the European Union (EU) there will be major, long-term ongoing changes for the UK internally, regionally and internationally.

approval. Once this has been achieved the resulting draft agreement will be sent to the UK Government for further negotiation in conformity with the requirements of paragraph 2 of Article 50.

The consequences will be felt far and wide through the generations. All parts of the UK’s economy and society will be affected, including the community of wealth management and broking firms that form the membership of the WMA.

According to paragraph 3 of Article 50, the UK will cease to be a member of the EU either on the date that the withdrawal agreement came into force, or 2 years from the date of the Prime Minister’s notification letter, or at another time if negotiated and agreed between the Council and the UK. This In this guide we explore those consequences third option is subject to unanimity within the in more detail and seek to identify what WMA Council, not a qualified majority, so may be more members specifically will have to think about difficult to achieve. It is not clear how agreement on following the leave vote. one or other of these options would be made so the length of time from notification to actually exiting So, what now? the EU because the “Treaties cease to apply” to the UK is at present indeterminate.

As a first step the Prime Minister will need to write to the President of the European Council to notify him, Commentary has so far taken it to be two years. But and through him all the other EU member states, there is a lot to negotiate, so it is far from clear that of the UK referendum result and the consequent this will be sufficient. For example, the withdrawal intention to leave the Union. agreement would need to cover the full range of common policies on agriculture, fisheries, and The Council on receipt of the letter will open internal external trade to which the UK subscribes, as well discussions on the arrangements it wishes to set for as big industries like pharmaceuticals, IT, aerospace the UK’s withdrawal and on the framework for the telecommunications and vehicle manufacture Union’s future relationship with the UK. which are very important to both the UK and other EU member states and in which a huge amount This will be a matter for the remaining EU members of collective investment has been made in the and the UK will not be included. The outcome of the organisation and location of key aspects such as discussions will go to the European Parliament for research, production and distribution.

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Financial services, which is especially significant to the UK, will come on top of all this. Given the enormous range of industries to be covered, arrangements to be unwound, and new agreements to be reached between both the EU and the UK, the UK and the rest of the world, and the remaining EU and other countries (the USA, for example, might take a very different view in the defence related sector about its relationship with an EU without the UK than one with the UK), the question about how things would be done and over what time period is not remotely answered.

As regards the EU/UK bilateral relationship, the framework for each industry and other activity are different and will most likely need to be dealt with on a case-by-case basis. This would not only tie down enormous resources on either side but would reveal many new interests, wishes, and tendencies to be negotiated and taken into account. How the EU would want to continue its relationship with the UK in financial services is not at all known; and nor is what the UK would want from the remaining EU in this sector. Many assumptions have been made, but these will not necessarily turn out to be right.

Any Treaty changes required once there is agreement on the arrangements for the UK’s departure from and future relationship with the EU will need to be subject to referenda both in the UK and in other EU Member States - how this will be dealt with is at present unknown.

It is important in all this to understand that, following the referendum result to withdraw, little or nothing

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will change immediately. The UK will remain a member of the EU for at least two further years, possibly more, in which time the eventual exit plans will be negotiated and published but during which time business will continue as before. Any changes will take place further downstream in the light of clearer understanding of the UK’s position globally and in relation to the EU, and specifically of what changes will be made to the framework for financial services business done by WMA member firms.

Firms when speaking to clients after the Brexit vote will wish to reassure them on this point.

A new relationship between the UK and the EU There is no clear model for a post-Brexit relationship between the UK and the EU, and thus for UK access to the EU Single Market in goods and services, including Financial Services. Formal discussions about the form that this will take will only begin after the UK Prime Minister notifies the President of the Council under Article 50. Whilst there is a range of existing models the UK’s relationship could be entirely different from any that currently exists.

The fact of the UK decision to leave the EU may react adversely with other member states and make the UK unpopular with them. They might in the light of this, decide to make it difficult for the UK, which could negatively affect negotiations on the withdrawal agreements and indeed other future arrangements with the EU that the UK may wish to make.

WMA Journal

Wider consequences of Brexit

Post-Brexit financial services regulation

The effect of the UK leaving the EU could be extreme and may lead to wider fragmentation within the EU for example by encouraging separatist tendencies in other member states. The degree of EU willingness to do deals with the UK as part of, or after withdrawal, may depend on the strength of its internal cohesion.

Weaker cohesion and strong separatist tendencies may imply a relatively stronger negotiating hand for the UK – and on whether a strong relationship with the UK is seen as a way of minimising the risk of complete break-up. It could also be influenced by the degree to which being relatively accommodating to the UK is seen as an encouragement to other Member States to secede in the future.

Like everything else related to Brexit, the nature of financial services regulation in a UK – even one that continues in itself to be unified – post-Brexit requires much speculation.

There has been some talk of the Scottish government using the UK’s exit from the EU to call for another referendum on independence. This is still an unknown but the out vote has certainly heightened demands for another vote given Scotland voted strongly in favour of remaining in the EU. If it does go ahead and Scotland decides to leave the UK, further dramatic consequences will follow from that. These would include potentially substantial changes to the structure and location of financial services firms between Scotland and England. In the post-war era in Europe only the dismantling of Czechoslovakia into the Czech and Slovak Republics offers an example of peaceful and organised transition from one state into two.

It has been suggested that the leave vote will offer an opportunity to reduce the overall burden of financial services legislation and regulation on the UK industry. However, the UK gold-plates EU financial regulation by far more than any other member state.

Also a good deal of such EU regulation begins life in the UK in the first place and is exported to Brussels for incorporation into legislation and re-exported back to the UK. So Brexit will not necessarily mean a reduced regulatory burden on UK firms.

Andrew Bailey, FCA CEO (and formerly CEO of the Prudential Regulation Authority), has clearly stated publicly that there would be no “bonfire of bank rules” if the UK left the EU . One possibility is that the EU will now become less regulated without the UK proposing new EU-wide regulations - thus enabling it to grow quicker – whereas the UK continues to introduce new regulations for financial services that act as a growth retardant.

There is also a risk that without the UK’s influence, the EU’s financial services legislation will diverge from the UK’s, with the EU being dominated by rules coming out of France and Germany, as the largest financial services centres in continental Europe, and essentially focusing on universal bank structures. For businesses that want to offer services to clients in the rest of the EU as well as in the UK, this could mean complying with two different sets of rules post-Brexit.

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If the UK chooses to apply for third country equivalence status, the European Supervisory Authorities (ESAs) will need to declare its legislative environment as equivalent to the EU’s in order for its firms to do business directly with clients located in the EU. Firms may or may not need to set up a branch for this, depending on the different legislative requirements for professional and retail clients. Equivalence does not necessitate the UK implementing identical rulebooks to the rest of the EU – there is some flexibility – but they have to target similar outcomes in each individual circumstance.

continue doing EU business. It also takes a long time to be declared equivalent: fast-track applications take at least 2 years. Equivalence decisions are low priority work for the European Securities and Markets Authority (ESMA) whose focus is on EU Member States.

For firms that operate solely in the UK consideration of some of these circumstances would not apply.

Brexit for them might for example remove the risk of overlapping regulation coming from EU and UK regulators, such as happened with the FCA’s Mortgage Market Review and the EU’s Mortgage Credit Directive. And if the UK did not simply If the UK were to go this route there are examples of it implement legislation identical to the EU, firms having been successfully negotiated by others, such could continue to have the same influence as now as the different Channel Islands, while Switzerland is over domestic policy makers, such as Members of gradually moving in this direction by implementing Parliament, HM Treasury, and the FCA. MiFID II/MiFIR so firms might be able to service some EU clients directly from within its territory.

But there is clearly a risk that this will not happen and if the UK’s legislation has to be equivalent to the EU’s, The UK would not in any event be able to apply for and especially if this means identical, firms will have equivalence until it is a third country – in other words, no influence over it at all. For firms that operate – or until after the Treaties shall cease to apply, as in Article plan to operate – in other EU Member States as well 50, paragraph 3. It is possible that equivalence for as the UK without establishing passporting rights existing legislation and regulation may be agreed within the EU, Brexit will mean having to understand as part of the UK’s exit agreement, on the grounds and comply with the conduct of business rules that we have until that date implemented the full operated by the different EU national competent panoply of EU enactments, but future regulations authorities. Some of these rules might be the same would nevertheless have to be considered on a case- across all EU Member States, but this would not by-case basis. always be the case. The situation will be different from current arrangements as the UK will be outside There may in this context, be pressure on the UK to the EU so passporting from within the UK will not be implement identical rules to the rest of the EU after possible. departure to get equivalence, but without the ability to influence them, as a price the UK has to pay to 28 @WMA_UK

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EU Regulations are administered by the ESAs and currently have direct effect from there into the UK. They are unlike EU Directives that must be transposed into national law by national Parliaments before being implemented in each member state. Following Brexit this will cease to be the case. The UK, then, will not be subject to ESA-imposed Regulation and will need to adopt new laws in those areas currently covered by them. These laws might be substantively the same but they could not be identical – references to the ESAs, for example, would need to be removed. Whilst this would entail much work as a large amount of law would have to be reviewed, it would not be difficult to achieve.

to consider how they will justify this should clients question them, but it is hoped that the material set out above will provide a basis for most firms to do so.

Firms should in particular consider the conduct of business rules that will relate to clients in other EU member states and what impact this will have on investor protection. Firms should bear in mind that their regulatory status as an FCA-regulated firm or as a branch of an EU firm may affect how they conduct their business for clients and where from. But clients should in general be comforted that in the UK the regulations around the provision of the kinds of financial services that WMA member firms provide, such as advice, discretionary management, and Communicating with clients about Brexit broking services could well apply unchanged and that the present parts of the surrounding framework As mentioned above, client communication for that offer further protection to private investors, WMA member firms in light of the Brexit vote is such as the compensation scheme, the complaints critical, especially in many cases if clients are to and ombudsman services, and the safeguarding of be retained. There is a risk that firms could lose client assets, will all remain in place. clients if they stay silent.

It may be appropriate to plan a series of communications as well as having something to send out. The aim will be to reassure clients but also to manage their expectations as there will be uncertainties until the form of the UK’s future relationship with the EU becomes clearer. And that, as has been said here, will take time.

If firms intend to continue to offer clients the same services as they do currently regardless of the outcome of the referendum, they should reassure clients that it will be ‘business as usual’. Firms will need

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BREXIT: Questions to consider CLIENT COMMUNICATION

CLIENTS

What message do

Do I have clients in other EU States?

I want to give clients?

Which ones?

Remember to give reassurances that

Do I plan to continue offering them

investor protection will continue

services?

When do I want to communicate with clients?

If so, think about my SERVICES

How? Email? Letter?

and BUSINESS STRUCTURE

SERVICES What services do I offer?

Where are they based?

If in the EU, do I want to relocate them?

If so, think about STAFFING. Do I need a passport to continue with those services as they are? Where will it be held?

Do I need to understand any new roles?

BUSINESS STRUCTURE Do I have connections to other EU States?

Are they branches, subsidiaries, parents?

Do I want to change this structure?

Do I want to set up any new entities post-Brexit in the EU?

STAFFING

Do I need authorisation from another Competent Authority in the EU?

Does my post-Brexit business and service structure require that I relocate staff?

Or employ new staff?

What are the associated costs?

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WMA Journal

Strategic Beta and Fixed Income

Jose Garcia-Zarate Senior ETF Analyst, Morningstar

The exchange-traded-fund (ETF) market is evolving fast. Investors now have access to a range of passively-managed products tracking indices which deliver active-like investment strategies. The market for “smart beta” ETFs, defined by Morningstar as “strategic beta”, is growing substantially.

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So far, the bulk of assets and product development have been concentrated in equity market exposures.

In fact, “strategic beta” and “equity factor investing” have become synonymous.

Meanwhile, assets in fixed income barely surpass 1% of the total strategic beta ETF marketplace and the number of products represents a small fraction of the total offering. Why is this?

When it comes to strategic beta, equity is a much more straightforward proposition than fixed income. The equity market is a much simpler environment where there is a one-to-one relation between a stock and the company it represents. By contrast, in the fixed income market any single entity – be it a government or a corporation – regularly issues a multitude of bonds with different characteristics (e.g. coupon, maturity, seniority) which determine differing patterns of behaviour. In addition, the equity market operates on-exchange with a single consolidated and transparent pricing structure, whereas the fixed income market operates over-the-counter (OTC) and feeds from a multiplicity of pricing sources.

The structural simplicity has made it easier for academics to research the factors driving equity market performance (e.g. value, momentum, volatility). This, as well as the enormous leap in the technological capabilities of the indexing industry, has paved the way for the development of benchmarks that isolate these well-researched factors. It was then only a matter of time before these indices were wrapped in passive funds such as ETFs and offered to the investor community.

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Despite the focus on equity, ETF providers have attempted to develop strategic beta fixed income products. The underlying idea has always been that market cap weighting is not a rational way of investing, as investors become exposed to the most heavily indebted issuers; thereby assuming a great deal of risk. This is a simple marketing message that travels well. However, the reality of fixed income markets is more nuanced than that.

The underlying idea has always been that market cap weighting is not a rational way of investing Indeed, any index built solely on this basis is bound to be highly defensive in nature. And there are many instances when being defensive is not a rational approach. Take for example the Eurozone sovereign debt market since mid-2012. Any rational investor should have opted to overweight peripheral – and most heavily indebted – issuers in a bid to benefit from the upside afforded by the ECB policy settings. Any index strategy biased to the safer issuers would have underperformed. Not smart!

determine an issuer’s real chances of default provides a more coherent exposure. However, these indices still retain a somewhat defensive tilt.

Despite these improvements, the potential for the development of strategic beta fixed income indices – and ETFs – remains largely untapped. The two key factors driving bond performance are interest rate risk and credit risk. Strategic beta indices which aim to shield investors from default risk only address one of these factors; and partially at that, given the defensive bias typically chosen for the strategy. Going forward, a greater focus from index developers on addressing interest rate risk on a dynamic basis would be welcome.

Going forward, a greater focus from index developers on addressing interest rate risk on a dynamic basis would be welcome.

While overcoming the difficulties of capturing active-like fixed income strategies in benchmark form, developers also have to make sure that the indices are not just good theoretical constructs, Of late, ETF providers have fine- but truly investable propositions. tuned the marketing message; Failing that, the ability of passive focusing on the issuers’ ability to fund providers to develop an pay rather than on their absolute offering of fixed income strategic level of debt. The combination of beta will remain curtailed. both a quantitative and qualitative macroeconomic assessment to WMA Journal

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Events Calendar 2016/7 @WMA_UK www.thewma.co.uk

events@thewma.co.uk

July M T

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5 12 19 26

6 13 20 27

7 14 21 28

4 11 18 25 5

F 1 8 15 22 29

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August M T W 1 2 3 8 9 10 15 16 17 22 23 24 29 30 31

T 4 11 18 25

F 5 12 19 26

S 6 13 20 27

7 13 15 22 29

CPD Seminar: Is LinkedIn worth my time?, London CPD Seminar: ICAAP, COREP Reporting & Pillar 3, London CPD Seminar: Evidencing Suitability – Meeting the regulator’s expectations, Manchester

6 6

October M T W

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3 4 5 6 7 10 11 12 13 14 17 18 19 20 21 24 25 26 27 28 31 5 6 11 13

S 1 8 15 22 29

S 2 9 16 23 30

January 2017 M T W T F 2 9 16 23 30

3 10 17 24 31

4 5 6 11 12 13 18 19 20 25 26 27

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S 1 8 15 22 29

26 Financial Crime Conference, London

April M T

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3 10 17 24

5 6 7 12 13 14 19 20 21 26 27 28

4 11 18 25

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27 Investment Conference, London

All dates & events are subject to change

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November M T W 1 2 7 8 9 14 15 16 21 22 23 28 29 30 8 9 15 24

Half-day Taxation Conference, London Women in Wealth, London Insight 360, London Midlands Conference, Birmingham

T F 3 4 10 11 17 18 24 25

S 5 12 19 26

7

CEO Dinner, London Annual Summit, London Young Wealth Management Network Insight 360, London

February M T W T 1 2 6 7 8 9 13 14 15 16 20 21 22 23 27 28

F 3 10 17 24

S 4 11 18 25

S 5 12 19 26

May M T 1 2 8 9 15 16 22 23 29 30

W T F 3 4 5 10 11 12 17 18 19 24 25 26 31

25 Insight 360, London

S 3 10 17 24

S 4 11 18 25

Fintech Conference, London Associate Members Update North Conference, Manchester Insight 360, London Ireland Seminar & Reception, Dublin

December M T W T 1 5 6 7 8 12 13 14 15 19 20 21 22 26 27 28 29

S 6 13 20 27

F 2 9 16 23 30

S 3 10 17 24 31

S 4 11 18 25

F 3 10 17 24 31

S 4 11 18 25

S 5 12 19 26

S 3 10 17 24

S 4 11 18 25

Insight 360, London

March M T W 1 6 7 8 13 14 15 20 21 22 27 28 29

T 2 9 16 23 30

8 Women in Wealth, London 9 Insight 360, London 13 Associate Members Update

22 Insight 360, London

S 2 9 16 23 30

September M T W T F 1 2 5 6 7 8 9 12 13 14 15 16 19 20 21 22 23 26 27 28 29 30

S 7 14 21 28

S 6 13 20 27

S 7 14 21 28

June M T 5 12 19 26 6 8 22 29

6 13 20 27

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T F 1 2 7 8 9 14 15 16 21 22 23 28 29 30

Women in Wealth, London Insight 360, London Summer Drinks Reception Compliance Conference, London

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WMA Journal Spring/Summer 2016

Would you like to contribute an article?

Alongside updates from the WMA, 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 WMA associate members. If you are an associate member who is interested in contributing to future editions of the Journal then please contact Jason Baxter, jasonb@thewma.co.uk or Sheena Gillett, sheenag@thewma.co.uk.

Journal design by Cicero No responsibility for loss to any person acting or refraining from acting as a result of any material contained in this publication can be accepted by the WMA, the author, publisher or printer. The views expressed by individual contributors are not necessarily those of the Association.

Company limited by guarantee. Registered in England and Wales.

No 2991400. VAT registration 675 1363 26. Published for the WMA

by WordWide London. Copyright WMA 2014.

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22 City Road Finsbury Square London EC1Y 2AJ Tel: +44 (0)20 7448 7100 Fax: +44 (0)20 7638 4636 www.thewma.co.uk Twitter: @wma_uk Members: enquiries@thewma.co.uk Non-members: info@thewma.co.uk

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