Consumer duty has created an expensive regulatory headache for wealth management firms in the UK, but it may help to ‘rebuild confidence’ in an industry that has been ‘on a real journey to improve standards.’
That’s the assessment of some of the leading wealth managers working with HNW and UHNW clients in the UK — who told Spear’s 500 Live that the new framework from the FCA, introduced on 31 July last year, is a ‘very ambitious goal’, but will be expensive for private banks to implement.
‘It just simply does add cost, when you’ve built a business along the original private banking paradigm, because that’s not based on the consumer duty,’ Charlotte Thorne, founding partner of Capital Generation Partners, told the audience.
[See also: The challenge of ‘consumer duty’ for the UK wealth management market]
‘I think it’s a very ambitious goal, but it will be expensive to retrofit the goals of the consumer duty onto businesses which were simply not designed to serve clients in that way.’
Her comments came in a panel discussion titled ‘From consolidation to consumer duty – the forces shaping the evolution wealth management for UHNW clients in the UK,’ presented in association with Multrees, which considered the impact of the increasing number of mergers and acquisitions in the UK wealth management landscape, the increasing impact of AI on the industry, and the challenges caused by new regulation.
While the new rules, focused around giving clients fair value for the financial services they receive and improving client communications, will be tricky to implement, the entire industry has been on a ‘journey to improve standards around clients’, said Ian Woodhouse, a strategy adviser for Multrees.
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‘We’ve been on this journey for a long time, sort of edged on by the regulator,’ he said. ‘I think some of the key areas going forward will be around thinking about the price that we charge the clients versus fair value. And I think we’re also going to be improving communications to clients.’
‘The burden of proof of consumer duty is on you,’ Lincoln Private Investment Office‘s Ross Elder told the audience of private wealth advisers.
He explained: ‘A big part of that is about trying to rebuild confidence in our industry. And I think that is sadly still essential.’ The duty would, he added, help to ‘ensure that when people create wealth, they will come to one of our firms to be looked after.’
While Thorne said she was a ‘big cheerleader’ for the new rules, she said the industry faced challenges understanding the framework. Thorne noted it took her firm a year to realise the rules wouldn’t actually affect them, given they work exclusively with professional investors.
Challenges of understanding consumer duty
‘We’re highly supportive of those targets and goals within consumer duty, but it can’t be right that it takes a business like ours a year to understand if we we’re going to be affected.’
Thorne added: ‘It’s disappointing that so much of the industry needs the consumer duty imposed upon it in this way, but but I think it’s no bad thing. It’s just frustrating for those of us who are cheerleaders for it, that it is expensive and challenging even to understand.’
Grant Parkinson, head of private banking for EMEA at Standard Chartered Private Bank, said the new duty’s focus on holding top C-suite figures accountable could be difficult for international wealth management businesses, with only a small focus on the UK.
When it comes to seeking an attestation that a company is compliant with consumer duty, ‘it must be the main bank board,’ Parkinson said.
‘You know, that’s quite a challenging conversation to have — for them to understand, that the relatively small UK business, this is what it brings with it.’
While many of its clients are international, coming from the ‘footprint markets’ of Standard Chartered in Africa, Asia and the Middle East, Parkinson added it was vital to ‘ensure that those clients advised from our London advisory centre are fully compliant with consumer duty.’
But this invariably leads to questions over the ‘proportionality involved in terms of how we demonstrate the good outcomes we’re delivering’ to UK consumers, Parkinson said.
The wave of industry consolidation continues
Increasing regulation in the industry, amid a backdrop of ongoing industry consolidation, was also making it ‘really difficult for new entrants to come into the market’ given the high costs in investing in new employment, Thorne said.
The largest wealth advisory firms were also having to grapple with increased business costs, leading to many trying to achieve scale through consolidation.
‘The wealth industry is the most fragmented sector in financial services in the UK today,’ Woodhouse said. ‘You have about 500 IFA firms, you have about 1000 or so family offices. And you also have somewhere in the region of 300 private client investment firms. So it’s a very fragmented industry, and so consolidation is on the agenda of most of the players.’
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In September, Rathbones joined forces with Investec Wealth to create the UK’s largest wealth management firm, managing £100 billion in AuM together. Meanwhile, in 2022, RBC acquired Brewin Dolphin, creating one of the country’s largest wealth manager firms, overseeing £58 billion in assets.
Private equity had also had an impact on increasing consolidation, but the sector is also ‘under pressure from rising interest rates,’ Woodhouse said, adding pressure on firms to maximise the value of their investments. Just yesterday, Hargreaves Lansdown rejected a £4.7 billion takeover bid from a collection of private equity firms.
He explained: ‘Consolidation going forward may be in a different form and shape. Most private equity firms now are becoming more hands-on investors in order to restructure companies because of the high cost of their capital.’
Thorne added: ‘It’s actually extremely expensive to run a slightly smaller-than-average business. So you can see why people, after a certain number of years, decided to throw in the towel and perhaps take the private equity money.’
Politicians ‘need a new strategy for UK wealth’
The panellists were also asked about the impact of the looming UK general election, tabled for July 4, but the panelists didn’t anticipate a significant impact of the result on the wealth management landscape.
Thorne said: ‘I’m quite sanguine about a new government. I think we already have uncertainty about what’s going to happen in the non-dom regime. There’s always been uncertainty, we now have additional uncertainty… we may still have another year or so after the election of a lack of clarity, but I think that’s business as usual.’
[See also: What does 2024 hold for family wealth?]
Woodhouse said it was necessary that the government were able to sympathise with and understand wealth creators. ‘We’re moving to an era of new industries, new entrepreneurialism —green tech, health tech, you know, all these new areas — huge amounts of wealth will be created. And currently, Switzerland is edging ahead, and Singapore is edging ahead. And so we need a strategy for UK wealth.’
Elder added that he believed a Starmer and Rachel Reeves-led government wouldn’t be ‘too detrimental’, given her attempts to ‘to warm the City up.’ ‘She’s talking about the fact that she’s looking to create the opportunity for investment and for innovation, while still trying to encourage stability…. I think she will do a reasonable job assuming that they they get in.’
Parkinson also ‘welcomed the engagement we’ve seen with the City from Rachel Reeves.’
He added: ‘Overall though, the international competitiveness and attractiveness of the UK is something that we should be concerned about, but that is a statement I would have made prior to the election, and afterwards.’
Spear’s 500 Live 2024 is presented in association with our partners, Multrees, Henley & Partners, Sotheby’s International Realty, Stewardship, CAF, The Kusnacht Practice, Invest Barbados, Institut auf dem Rosenberg and Justerini & Brooks.
