The Personal Investment Management & Financial Advice Association
JOURNAL
AUTUMN 2018
Building Personal Financial Futures
Contents What the Senior Managers’ Regime Could Mean for Enforcement Against Individuals, Enforcd..........4-7 Financal Adviser Market: In Numbers, PIMFA...................................................................................8-9 PIMFA-AECIS - Enabling Collaboration to Prevent Financial Crime, Financial Crime Intelligence.................10-13 PIMFA Member’s Manifesto 2018, PIMFA....................................................................................................14-15 Social Investment: Maintaining Momentum and Managing Risk, Herminius (A Part of Philanthorpy Impact)............16-19 PIMFA FinTech Conference 2018, PIMFA...............................................................................................................20-21 Suitability - Is Everything Under Control?, Bovill ...............................................................................................22-25 The NMBA Apprenticeship Programme, NMBA...........................................................................................26-27 Upcoming PIMFA Events Calendar.........................................................................................................28 Hacker Girl, Risk Management Group...............................................................................................29-33
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 for editions theperson Journalacting then please contact: No responsibility loss toofany or refraining from acting as a result of any material contained in this publication can be accepted Richard Adler, Director of Strategic Partnerships by the PIMFA, the author, publisher or printer.(richarda@pimfa.co.uk) The views expressed by or Sheena Gillett, Head of PR & Communications (sheenag@pimfa.co.uk) individual contributors are not necessarily those of the Association. Company limited by guarantee. Registered in England and Wales. Journal design by Cicero No 2991400. VAT registration 675 1363 26. Published for PIMFA
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What the Senior Managers’ Regime Could Mean for Enforcement Against Individuals Last summer, the Financial Conduct Authority (FCA) published its long-awaited consultation on the extension of the Senior Managers & Certification Regime (SM&CR) to all FCA-regulated firms. The Consultation closed on 3 November 2017 and a Policy Statement was released in July, with implementation anticipated in December.1 According to the FCA, “There are many types of firms that will now be under the SMCR. These range from global firms such as large asset managers, to firms with only one person where financial services are ancillary to their core activities.” 2 The Consultation, and now the policy statement, provided important details about how the regime will operate for different types of firms, with the intention that it will apply in a proportionate manner, relative to a firm’s size. A common element, however, is the requirement that all Senior Managers have a Statement of Responsibilities. Larger (designated “enhanced”) firms will need to draw up Responsibilities Maps, create handover procedures, and make sure there is a senior manager responsible for every area of their firms. In principle, a senior manager’s Statement of Responsibility will make it easier for regulators to establish the link between the individual, the activities under their control and any breach of law or regulation. Senior Manager’s must also take reasonable steps to ensure that the business areas for which they are responsible are controlled effectively, comply with relevant laws and regulations, identify information which would be of interest to the FCA or Prudential Regulation Authority (PRA), and disclose it. Speaking at the Legal Week Banking Litigation and Regulation Forum in June 2017, Jamie Symington, then the FCA’s director of Investigations (now a lawyer at Brown Rudnick), said: “generally where there are grounds for investigating a matter, there will be a need to investigate the role of senior management in the conduct issues that arise”. 3 July’s policy statement largely reaffirmed the provisions in the consultation. The majority of responses were supportive of the FCA’s proposals, but some sought clarification about what the proposals will entail. The policy statement therefore included a few changes to the proposals as well as publishing an in-depth guide for FCA Solo Regulated Firms.
The regime is likely to make it easier for the regulator to take enforcement action against senior managers
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The main aim of the Statement of Responsibility is for regulators to more easily identify where decisions have been taken, when the consequences of such decisions turn out to be detrimental to a firm, the markets in which it operates or its customers. Senior managers will not be able to hide behind the joint decision-making of a board and will be held personally accountable if things go wrong on their watch, and they can be proved (on the balance of probabilities) to have failed to take reasonable steps to prevent the errors. It remains to be seen whether the regime will, in fact, lead to more actions against individuals within firms. Nonetheless, senior managers who are going to be caught by the regime when it comes into force are worried.
First enforcement actions under SMCR In the wake of SMCR FCA enforcement action has increased by 23% in the last 12 months, with the number of investigations into crime and governance soaring . The number of open investigations grew from 410 in April 2017 to 504 in March 2018. Over the summer, the first case under SMCR also concluded. This was against the Barclays CEO Jes Staley who was fined £642,430 for breaching the standard of care required in his pursuit of an internal whistle-blower. The Prudential Regulatory Authority and Barclays have also taken back £500,000 in bonuses over the affair. The bank will also have to report regularly to the FCA about how it handles whistleblowing after the regulator raised concerns about the systems it has in place. This case has shown that senior managers will be held personally accountable for breaches, and that reputational risk will be an issue for both the company and the manager. Concerns raised over Barclay’s system for dealing with whistleblowing also suggest companies are still struggling to come to terms with their whistleblowing requirements. Concerns have been raised about the FCA’s findings in the Staley case. It was careful to state that his actions related to his competence rather than integrity. This precedent could make it difficult to pursue individuals on the basis of integrity in the future.
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To date this is the only case to have been concluded under SMCR, although there are others in progress. A review of cases concluded in 2017, meanwhile, shows the FCA’s focus has been primarily on integrity failings.
WHAT FIRMS NEED TO DO UNDER THE SENIOR MANAGERS REGIME
The pros and cons of SMCR The FCA already names and bans individuals, but generally only in those cases where the link between egregious behaviour and culpability is clearest (in cases where, for example, the accountant falsifies accounts, where the independent financial adviser defrauds customers and where there is market abuse). After the financial crisis, the public and its elected representatives were disappointed by a perceived failure of action against leaders of financial institutions. Statements of Responsibility are a partial answer.
If a person performs a senior management function, the firm will need to… ◆◆
Satisfy itself that the candidate is suitable, or “fit and proper”, to carry out a senior management function.
◆◆ Apply for that person to be approved by the FCA, before the person takes up their role.
◆◆ And send the FCA a statement of
The difficulty is that organisations of any complexity rely on committees and/or working groups of subject matter experts drawn from across the organisation to deal with wide-ranging regulatory change (and take strategic decisions).
responsibilities as part of the application.
Arguably the FCA’s role is not to punish, but to educate and correct. Not all cases that could result in successful enforcement action are pursued, especially if there has been a flurry of similar cases within a particular sector. This policy works in the case of firms, but it is bound to be perceived as unfair when applied to individuals. There is a problem with organisations that are “too big to fail”. They are too big to manage without significant amounts of delegation. The Senior Managers Regime may be viewed by some as an extended charter for ever greater numbers of internal auditors, providing assurances that enable senior managers to discharge their conduct obligations and ever greater numbers of project managers to remediate issues. This might draw resources away from the things that matter: upto-date IT systems generating better management information and effective automated controls, for instance. This is not the regulator’s intention, but in an environment where margins are under increasing pressure and resources are limited, senior managers making decisions on allocation may be inclined to devote funds to areas that mitigate their personal regulatory risk. For smaller organisations, challenges will be in successfully implementing what is a fairly complex set of proposed rules. Most buy-side firms will fall under the “core” regime, but many who may regard themselves as low-risk may be captured by the “enhanced” regime, meaning compliance with a greater number of requirements. The need to administer the Certification Regime may also be a headache for firms.
Practical steps firms can take to prepare In the Consultation Paper, the FCA published three boxes outlining what firms will need to do under each strand of the regime (see the diagrams below). These provide clarity and serve as helpful ready reckoners on key obligations not just for senior managers and firm employees, but also for all other staff (bar “ancillary staff”, e.g. catering, premises) bound by the Conduct Rules.
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If a person performs a senior management function, the firm will need to… ◆◆ Update and resubmit the statement of
responsibilities to the FCA whenever there is a significant change to a senior manager’s responsibilities.
◆◆ Assess, at least once a year, that all its senior
managers are fit and proper to carry out their jobs.
◆◆
And, unless it is a limited scope firm where prescribed responsibilities do not apply, make sure it has appropriately allocated all the prescribed responsibilities to its senior managers.
What senior managers need to do… ◆◆ Anyone who is a senior manager will
have a “duty of responsibility”. Senior managers should understand what this means in the context of their jobs.
◆◆ Senior managers must ensure that their
statements of responsibilities are accurate and up to date.
◆◆ And there are also Conduct Rules that will apply to senior managers.
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WHAT FIRMS NEED TO DO UNDER THE CERTIFICATION REGIME The Certification Regime will make firms more responsible for assessing that their staff are fit and proper to carry out certification functions. FCA approval is not required for anyone who performs a certification function.
Firms will need to… CONDUCT RULES: TWO OBLIGATIONS ON FIRMS FOR OTHER STAFF For all other staff bar ancillary staff, firms are also obliged to: ◆◆ Train staff ◆◆ And notify the FCA when there has been disciplinary action taken because of a breach of the Conduct Rules.
Identify employees who perform a certification function.
Assess whether those employees are fit and proper to perform their roles. Firms need to do this assessment at the point of recruitment (or before a person performs a certification function) and on an ongoing annual basis.
A firm must also allocate the prescribed responsibility for the firm’s obligations for Conduct Rules in notifications and training.
And issue certificates to employees if they are satisfied that such employees are fit and proper to perform those certification functions.
What individuals need to do Where the Conduct Rules apply, people need to be aware of and comply with the rules as part of their jobs.
The certificate needs to…
Concluding thoughts In “Where Next for Investment and Asset Management Regulation?”, a speech made in late September 2017, Megan Butler, the FCA’s executive director of Supervision – Investment, Wholesale and Specialists, said, “We see personal accountability as fundamental to the future of financial services.” State that the firm is satisfied that the person is a fit and proper person to perform the function the certificate relates to.
Set out in what aspect of the firm’s affairs the person will be involved as part of performing their function.
If the firm completes a fit and proper assessment and but decides not to issue a certificate to someone, it must give the person a notice in writing setting out:
All those who will become senior managers under the new regime need to ensure that they are adequately supported by able staff and that their firms start to consider the regime’s likely impact. Ultimately, it’s about improving culture and conduct across the industry and, handled well, it may be a force for good governance and organisational efficiency and clarity. Megan Butler also reassured the industry in her speech about the fact that the FCA will listen to concerns and feedback, saying, “We want the new regime to be proportionate. We also want it to reflect the fact that each of you is different . . . We are primarily interested in outcomes in this area and we operate in the real world.” The real world is also a place in which mistakes are made and accidents happen besides being a place where misconduct is the result of deliberately transgressive behaviour. Senior managers under the regime are far more likely to be held to account in all circumstances than they are now, but until some cases start to be heard under the regime and it is put to the test, it is difficult to predict how worried senior managers ought to be.
Jane Walshe, CEO and Co-Founder, Enforcd and former Lawyer, Enforcement Division, FCA
What steps (if any) the firm proposes to take in relation to the person as a result of the decision.
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And the reasons for proposing these steps.
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1 See https://www.fca.org.uk/publications/consultation-papers/cp17-25-individual-accountability-extending-smcr. 2 See https://www.fca.org.uk/publication/consultation/cp17-25.pdf,. 3 See https://www.fca.org.uk/news/speeches/investigations-evolving-approach,
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The Financial Adviser Market: In Numbers The latest PIMFA “Financal Adviser Market: In Numbers” report provides a comprehensive overview of the financial adviser market and the trends within it. Care is needed with comparisons over the times series for some of the data. The FCA has made changes to the categorisation of “financial advice firms” in its database, which has resulted in a slight change to firms details that were included in the past. We have data from 2013 on the revised basis, but older data points are based on the previous categorisation. To provide clarity we have included the previous categorisation data for 2013 in the footnotes. We think that the changes are sufficiently small to warrant the inclusion of the data from earlier years, which shows the direction of travel of changes in the profession but the user needs to be aware that they are not comparing strict like for like data in comparing pre-2013 with post-2013. The data for 2016 was also subject to a further change owing to the FCA’s continued work to review the categorisation of firms as specific firms’ mix of business may change over time. This year, we have decided to keep with the categorisation of firms in the same way as they are viewed by the industry and the FCA, as we want to see firms represented who do not mainly undertake insurance work but where their core business is financial advice. For clarity, we have used the present FCA categories and realigned 2016 data to these same definitions too, so please be aware of this when comparing the current data on a like-for-like basis with last year’s. So, what actually happened in 2017? Firstly, we saw the number of advisers rise to a small degree. Conversely, we also saw a slight reduction in the number of advice firms, demonstrating some consolidation, with some finding the new world order too much to bear, but, overall, the number of firms has remained more or less constant for the last decade. There has been a large jump in turnover, especially since there are less firms overall - up by 22% on 2016. Pre-tax profits have also jumped significantly in 2017, at £699m (up by even more than Revenue at 23%) whilst retained profits have more than doubled since last year. The margins in the sector remain thin when looking at Profits before Tax, but on a Retained Profit basis have nearly doubled and are the best they’ve been in nine years. Looking forward, PIMFA remains concerned about access to advice with the growing need people have for help and this
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has been clarified in recent reports on the industry as financial clarity and comprehension of even some basic products is still very low among a substantial part of the population. The Financial Advice Market Review (FAMR) was needed but still further progress has to be made to make advice clear and simply understood. The regulatory and policy environment still needs to be effective and clear so that client clarity and the need for good advice is heard. Further measures are desired and as we can see from recent studies into long term saving we need to broaden access to affordable financial advice that meets people’s needs and to make sure the information and products are clearly explained and made clear to even the most unsophisticated client. The data we have collated in the report will be used to help PIMFA formulate its policy initiatives and to help with our understanding of the impact of policy and regulatory changes on the market. In this years’ report, the data is representative of how the FCA categorises financial advice as we want firms and their figures to be actual values that can be understood with clarity and relevant to their main business function. Funds under management have risen nicely over the last couple of years but we can see a reduction in ISA subscription over the last few years. 2016 - 2017 was particularly bad, with a yearly drop off in Cash ISAs of 33%. Stocks and Shares ISAs remained flat or had slight improvement. When looking at cash in other areas, particularly with the cash based Savings Ratio dropping and being the lowest in a decade, we can see people are viewing cash as necessary, especially in these precarious times of Brexit and the uncertainty surrounding it. Of course, if the cash based savings ratio trend continues like this, it will mean simply that households are spending more than they earn. Funds under management, like the stocks and shares ISAs, have not suffered and are ramping up decently year on year, so we can see mainly a problem with cash equivalents. Also similarly UK domiciled unit trusts and OEICs have risen with
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gusto and demonstrate a real drive with 67% improvement for the last quarter of 2017, mainly through intermediaries pushing the products, not really attributed so much towards platforms or direct investment. As we can see from the market details, fees for Retail Investments have ramped up steeply at nearly 31% year on year as investment activity flourishes. As many equity markets are at or near all-time highs, some granularity may be needed here to ensure clarity. Mortgage business has ramped up by 29% in terms of average revenue per annum on a firm basis as 2017 was a year of activity after the more subdued 2016 Brexit Referendum year.
31%
As we can see from the market details, fees for Retail Investments have ramped up steeply at nearly 31% year on year as investment activity flourishes. As many equity markets are at or near all-time highs, some granularity may be needed here to ensure clarity.
Even though advisers have increased there is still a significant rise in revenue earned per adviser in 2017 with an 18% jump year on year, demonstrating the continued need for advice. In relation to all firms with an FCA primary category of Financial Adviser, the profits before tax of all business generated by the firms was nearly 23% higher than in 2016. Profits as a percentage of revenue flat-lined but this is actually a good sign as these margins had been decreasing for the three previous years. Finally, firms’ retained profits more than doubled in the last year showing how lucrative the profession still is in the new, predominantly fee-based world. As one adviser mentioned, the market still has “hoops to jump through” but it’s a completely different landscape now compared with twenty years ago. The sector is showing both resolve and adaptability and, with most adviser firms being small in number and therefore nimble, this suggests that they will become more effective as they progress. The number of firms may have reduced but this is not a negative as the ones who do survive are more competitive and more adaptable. Advisers themselves have increased in number, demonstrating the ever present need in the UK market for advice. When this is viewed in line with recent research publications on pensions and financial product awareness, there is still a recognised gap in retail confidence when it comes to understanding finance and its benefits, which needs to be filled. As long as this is the case firms and advisers will have the ability to flourish. In summary, we can see challenges ahead for advisers as they negotiate the ever increasing regulatory burden, yet we still see enthusiasm in the sector and both a willingness and desire to deliver more for clients in a more professional and refined way. The full report can be found on the news and research section on the PIMFA website.
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Mortgage business has ramped up by 29% in terms of average revenue per annum on a firm basis as 2017 was a year of activity after the more subdued 2016 Brexit Referendum year.
18%
Even though advisers have increased there is still a significant rise in revenue earned per adviser in 2017 with an 18% jump year on year, demonstrating the continued need for advice.
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PIMFA-AECIS - Enabling Collaboration to Prevent Financial Crime Financial Crime is costing the UK economy £193 billion a year
The Criminal Finances Act 2017 provides further protection
Limited financial crime intelligence sharing is contributing to the significant losses suffered by financial institutions (FIs) and their clients. The 2015 Home Office Impact Assessment on Information Sharing states:
The Act, which was introduced in November 2017, is designed to:
“Financial profit is the driver for almost all serious and organised crime, and other lower-level acquisitive crime. The UK drugs trade is estimated to generate revenues of nearly £4bn each year and HMRC estimate that over £5bn was lost to attacks against the tax system in 2012/13. Criminals launder their money – moving, using and hiding the proceeds of crime – to fund their lifestyles and to reinvest in their criminal enterprises. The best available estimate of the amounts laundered globally are equivalent to 2.7% of global GDP, or US$1.6 trillion in 2009, while the National Crime Agency assesses that billions of pounds of proceeds of international corruption are laundered into or through the UK. This threatens the integrity and reputation of our financial markets.”
◆◆ Encourage greater data and information sharing in the regulated sector, leading to more insightful suspicious activity reports (SARs) to law enforcement. ◆◆
Allow the private sector to take measures to better protect themselves from money laundering. ◆◆
Provide investigations with better information, leading to improved anti money laundering and terrorist finance outcomes. Provisions in the new legislation provide FIs with greater legal protection when they share information on financial crime cases and is a major step towards enabling direct cooperation between FIs where appropriate.
What is Financial Intelligence? It is important to note the difference between information and financial intelligence. Information is raw data whilst intelligence is data that has been analysed, evaluated and processed into intelligence. An entity leaves a footprint of information wherever there is interaction. In situations where such interaction appears suspicious value and significance is attributed. Information is created through interaction between an entity and an organisation which forms the basis of intelligence. Legislation exists to ensure such information is held for a correct purpose and that the duty of confidentiality is strictly complied with. This is often perceived as an obstacle to certain intelligence sharing due to fear of an unwitting breach of regulation. Trust in another organisation to handle the intelligence within the basis it was shared is another legitimate concern.
FI to FI Intelligence Sharing enables early Detection and Prevention Conventional information sharing hubs invite member firms to submit a package of intelligence which is then made available to all other participants. This behaves as a deterrent to sharing information about specific individuals for fear of litigation. In contrast, a scenario involving data matching on individuals/ companies already identified through the course of the investigation process can address such concerns. By connecting the relevant FIs in this way their litigation risk is mitigated because they have already independently initiated their own investigations. Therefore, intelligence sharing is facilitated through the matching of entity data on existing cases.
Financial intelligence is the key to the investigation of crime, prosecution and subsequent asset recovery. The initial stage of investigation involves bringing related but isolated facts into proximity of each other as in the vast majority of cases a conclusion only becomes possible once financial information from separate sources is combined. According to independent research financial institutions hold massive amounts of valuable intelligence, however, only 5% is used to combat illicit financial activities. Shared information and ‘big data’ create an opportunity for those engaged in the investigation of financial crime to leverage quality intelligence.
Under the current legislation FI to FI intelligence sharing about specific entities and attached cases is already justified with this method. FIs can conduct their investigations in a leaner and more efficient way and intelligence gaps are filled as a result.
PIMFA-AECIS – Case Management and Collaboration System Is it legal to share intelligence? The Data Protection Act 2018 contains regulations on processing personal data in the appropriate circumstances. These also allow for intelligence sharing between FIs where they have a legitimate interest in preventing financial crime and legal obligations to protect their customers from it.
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PIMFA & associate member FCI Ltd have launched the ground breaking PIMFA-AECIS (Assimilated Economic Crime Intelligence System) to enable intelligence sharing between member firms. The cloud based PIMFA-AECIS system is unique as encrypted data is only made transparent when an exact data match occurs between two or more cases. Members are able to record their cases and then collaborate at their own discretion by creating Investigation Groups. Participating firms remain in control of their own data throughout and the PIMFA-AECIS methodology strictly adheres to GDPR. The platform incorporates comprehensive control, audit and governance capabilities.
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PIMFA-AECIS in Action
PIMFA-AECIS - How it Works
1. Create a Case
2. Automatically finds your Matches
1. User initiates Case Compare
2. Search request launched with known entity credentials
3. Read only request launched with known entity credentials
PIMFA-AECIS Case Management System
PIMFA-AECIS Case Management System
PIMFA-AECIS Case Management System
Case Collaboration
Your Case
Internal Connected Case
External Connected Case
4. Only known matching data returned
3. Analyse Matched Entry Data
Case Comparison
5. Matching case data identified & Investigation Group is created 4. Invite Trusted Organisations to join Investigation Group Data is never moved from one user database to another
PIMFA-AECIS In Summary 5. Outcome
Enables Regulation Compliant Sharing
Reduces Duplication
Reduces Financial Crime
◆◆ ◆◆ ◆◆ ◆◆ ◆◆ ◆◆ ◆◆ ◆◆ ◆◆
Create your own Trusted Intelligence Sharing Community Your Case/Entity is automatically placed in context of others No obligation to collaborate User identity anonymised until collaboration agreed Reduced investigation time results in significant Time and Cost Savings Quickly identifies repeat frauds/offenders/networks thereby Protecting Clients Targeted individuals/companies can be provided with tailored fraud prevention advice Improves Public Perception of participating organisations Enables Users to Demonstrate Best Practice to the finance industry and regulators
Chris Anderson Protects Potential Victims
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Reduces Losses
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Results in more Effective SARs
CEO, Financial Crime Intelligence
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PIMFA Member’s Manifesto 2018 In June of this year, PIMFA launched our Member’s Manifesto at our Summer Drinks Reception at the House of Commons. The manifesto lays out the organisation’s vision for the sector and the approach required to create the optimal operating environment for member firms to deliver their services and meet client needs and is the result of extensive consultation amongst members. At the core of the Manifesto is a 6 Pillar approach summarising the areas of focus identified to achieve the vision for the sector – designing a sector for the future, enabling access to it, ensuring appropriate and proportional regulation of it, developing robust and thriving markets whilst also ensuring business protection and enabling digital business transformation through a sector-wide digital strategy. In addition to the Manifesto, and in support of it, PIMFA, at the same evening celebration, launched a financial crime platform in conjunction with Financial Crime Intelligence, which will allow members to record and communicate firms and individuals marked as high risk. This platform, believed to be an industry first, will also allow members to form investigation units, sharing intelligence on criminal incidents. Detailing both PIMFA commitments and ‘calls to action’, this cornerstone document reflects the shifting landscape for our industry and all who work within it – from those on the front line giving assistance to individuals, families, charities,
Enabling Access
The Future Sector
PIMFA’s mission is
pension funds, trusts and companies, to stakeholders from HM Government, Regulators, the media and beyond. Chartered Financial Planner Gary Bottriell, of Bottriell Adams, who is a PIMFA board member and attended the event, said the creation of PIMFA was beneficial to the industry and the combined body should be more capable of supporting it than the previous bodies. He said: “Over the last 20 years IFAs morphed into looking more like wealth managers and the traditional stock brokers started to look a little bit more like IFAs. As the two business models came close together [this] was not well supported by two completely separate trade associations that were focusing on the old business models. The manifesto is a rallying cry for members, saying we are addressing what you have come and told us to address.” The manifesto builds upon some of the recent PIMFA successes, such as FCA’s confirmation that product providers will pay 25% towards the FSCS levy following continued lobbying over many years, resulting in a reduction in the overall size of the pot and a reduction of costs to firms. Alongside this, frequent PIMFA interventions with major stakeholders, from both Houses of Parliament and the Government in relation to Brexit, to the FCA and ESMA in relation to regulatory matters, have influenced the official approach and affected regulatory change in both the UK and the EU.
Supervision and Regulation
Robust and Thriving Markets
PIMFA’s chairman John Gummer, Lord Deben, said PIMFA will continue to be a tough defender of the industry. He said: “We have a huge need to be very clearly on the side of defending and protecting the trust of our customers and potential customers. We need that particularly today because, even though we have a government which claims to be a deregulatory government, it is very interesting that in the financial services sector it continues to be increasingly regulatory and, indeed, its kneejerk reaction to anything is regulation. That said, regulation is important and it enhances the reputation of the sector. It needs now to be an enabler to allow firms to grow and develop.
Drive outcomes to increase trust and confidence in the sector, showcasing PIMFA members as a force for good
Liz Field, PIMFA’s Chief Executive, says: “Over the last 27 years PIMFA, or its previous incarnations, have been at the forefront, helping member firms and their clients plan for and thrive amongst these new challenges. This manifesto is an important evolutionary step in that process, outlining the 6 key areas of focus for the next 5 years identified from extensive member engagement. With demographic shifts reinforcing the need for an investment and savings culture in an environment of Brexit uncertainty, technological change and requirements for talent and skills, the need for our profession is now even greater. We have been faced with the greatest raft of regulatory change in 20 years and now is the time to enhance education, build trust and forge a new era of understanding about our profession and the benefits it can bring.”
Business Protection
Represent the sector in recommending and leading policy and regulatory thinking
Digital Business Transformation
Foster a culture of saving by helping to make it easier for customers to receive investment and other professional advice
Promote a positive image of the sector to the public and policymakers alike, showcasing PIMFA members as experienced and trusted financial services professionals who work with clients to secure their financial futures
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the investment is taking place – is the business making money based on a sustainable competitive advantage or just a potentially unsustainable set of personal and political connections?
Social Investment: Maintaining Momentum and Managing Risk
What are the underlying risks? Within social investment and philanthropy, detailed non-financial due diligence can answer the same important questions but can also be used to analyse the ‘impact case’: are the intended outcomes of a project achievable and sustainable? Do the main players have a track record of success? Are there any contextual reasons which may prevent the investment from achieving its stated aims (e.g. incoming regulation or political shifts)?
Social investment is nearing a critical juncture where its survivability – as a way of identifying new sources of financial return and an innovative method of contributing to society – depends on its ability to remain honest, effective and accessible.
To debunk a few myths about due diligence reporting: it may be done in-house or externally; it doesn’t have to be expensive; it doesn’t have to consist of long, dry reports; and, it isn’t only about identifying ‘red flags’ and preventing investment. Due diligence can be used positively to help identify the right partners, projects and strategies to navigate the ‘red flags’ and reduce risk, even in challenging environments.
To do so also requires that social investment and philanthropy continue to comply with the latest tax requirements and regulation – cue the informed and equipped wealth adviser!
Robust due diligence practices are not only prudent for investors, but tax authorities are increasingly requiring evidence of proper management of funds that are claimed as charitable donations or impact investments. As tax incentives for philanthropy and for social investment grow (e.g. the Social Investment Tax Relief scheme in the UK), authorities are likely to harden on their assertion that ‘relevant and proportionate’ due diligence be conducted into the recipients of charitable donations or social investment, and the end use of funds.This will only be exacerbated by recent scandals over the tax affairs of (U)HNWIs, criticism of donor-advised funds, and allegations that charitable giving has funded extremism in the UK and abroad.
As a sector enjoying a great deal of attention, social investment is under increased scrutiny from a variety of stakeholders. This ranges from charities and social enterprises using private sector approaches to scale up their activities, to donors and investors seeking genuine impact and sustainable financial return as well as to tax authorities keen to ensure that tax advantages are given only when they are deserved. Borrowing best practice from other heavily regulated and scrutinised sectors, such as conventional emerging markets investment, can provide wealth advisers with helpful tools to navigate regulatory pressures, unlock opportunities and support their clients’ ambitions for maximising the impact of their wealth.
Remaining effective – learning from international development Social investment must prove that it is an effective philanthropic activity. It can do so by promoting and communicating accurate and clear impact measurement which helps align the ambitions of investors and investees.
Remaining honest – learning from conventional investing Impact investing must be viewed as an honest practice with good intentions for tackling the root causes of social problems, not one that takes ill-informed risks or one that is hijacked by the impact equivalent of ‘green-washing’.
It is now widely accepted that the measurement and analysis of impact is extremely important to charities and social enterprises wishing to encourage further investment/funding, promote their mission and maximise their impact.
Honesty is not always a trait associated with conventional investing. The burgeoning market for detailed non-financial due diligence reporting on potential investments is, however, representative of a more ethical attitude to traditional investing, as well as the regulatory pressure applied on the financial sector in recent years. The long-awaited arrival of MiFID II (Markets in Financial Instruments Directive) on 3 January is testament to this and has particularly significant implications for investing in emerging markets and developing economies where transparency and the rule of law may be low.
However, the recently published Growing a Culture of Impact Investing in the UK report highlights that 52% of people surveyed in the UK avoid impact investing because of the difficulty associated with measuring social impact. Measuring and managing impact is often viewed as overly academic, jargonloaded and expensive. This does not have to be the case and the world of international development provides a great deal of experience in lean impact monitoring and evaluation (‘M&E’) practices. One of the principal impact management tools is the ‘theory of change’ – which aims to set out the visible effects of a social problem, then dig into the underlying causes. Understanding the underlying causes allows the design of genuinely effective interventions, and observing the resulting changes in the visible effects allows proper metrics to be designed. This provides verification that the underlying causes were correctly identified and are being tackled properly.
Borrowing best practice from other heavily regulated and scrutinised sectors, such as conventional emerging markets investment, can provide wealth advisers with helpful tools to navigate regulatory pressures, unlock opportunities and support their clients’ ambitions for maximising the impact of their wealth.
It is now widely accepted that the measurement and analysis of impact is extremely important to charities and social enterprises wishing to encourage further investment/ funding, promote their mission and maximise their impact.
Detailed due diligence helps to ensure that an investment is not at undisclosed risk, and that funds will be used for the stated purpose in an economic and political context that is conducive to making the most of the investment. Within private equity, one very frequently hears that the most important information for an investor is a) about the key people involved – what is their track record? are they reliable? – and b) the context in which
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A theory of change can sometimes require detailed research and analysis. But, even an hour spent brainstorming root causes can be invaluable in ensuring that all stakeholders understand the problem they are tackling and that they are not simply alleviating symptoms. Once complete, a theory of change tells
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the story of how the desired change is expected to occur, and should help satisfy all parties, including tax authorities, of the social intentions of an investment or grant. Often used by purpose-driven organisations, but rarely explained to investors and philanthropists, a well-informed and logical theory of change can be a powerful process to engage a potential investor and ensure that their ambitions for impact are best met. For example, a wealth adviser recently reported that a client stated that they wanted to invest to help achieve the UN Sustainable Development Goals in Africa – a fairly tall order. After several emails and scattered conversations, it became clear that the potential investor had an interest in improving women’s education in West Africa, where they had family. At this stage, using a theory of change framework to analyse where the need is and how a philanthropist or investor wants his or her money to be used will help identify suitable opportunities aligned to the client’s principles. Remaining accessible – learning from each other Social investment must remain an accessible funding solution, available to a wide range of concerned citizens, whilst avoiding becoming a niche discipline, practised by an informed few. Accessibility and awareness are major limitations within the field of social investment. It is common to hear charities and project leaders citing a lack of capital as a constraint to growth; but it is also common to hear that deal flow remains low and people struggle to find impact projects at an acceptable scale for investment. It was concerning to read in Growing a Culture of Impact Investing in the UK that a Centapse study revealed that people with financial advisers were less aware of social impact investment than those without. Wealth advisers and other intermediaries can play a crucial role in helping both sides talk to each other, creating awareness of the broad spectrum of impact investments available and establishing partnerships to help charities and investors achieve their social and/or environmental goals. Conclusion Social investment can ensure its upward momentum and mitigate risks to its success by working towards what New Philanthropy Capital calls an ‘evidence led social sector’. A more rigorous approach to understanding and communicating impact, risk and sustainability should be embedded into the impact eco-system. Fortunately there is no need to reinvent the wheel, and proven approaches from conventional due diligence and international development can be adapted to suit the needs of investors and philanthropists for greater clarity on the true impact of their activities. In turn, these approaches have the dual benefit of helping social investors and philanthropists meet the requirements of the ever-shifting sands of tax and regulation.
Peter Wilson, Managing Partner, Herminius (A Part of Philanthorpy Impact) Ed Whitten, Director, Herminius (A Part of Philanthorpy Impact)
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PIMFA FinTech Conference 2018
PIMFA’s annual FinTech Conference presented a fascinating array of ideas and rationales as to how and why technology can and should become central to the operations of the wealth management and financial advice industry, how it can change the way we think about and approach a whole range of activities including early engagement with Millennials, regulatory reporting and the strengthening of positive outcomes for savers and investors.
no investments at all and that there is in excess of £700 billion in cash savings accounts, so the prize for increased engagement and the opportunity to get people investing for the first time is very real, illustrating the rapid nature of change by stating that “People didn’t know they needed an iPhone until they had one, so don’t be afraid to innovate”. This ‘hybrid’ view was later supported by, amongst others, Greg Davies, Head of Behavioural Finance for Oxford Risk, who voiced the feeling that the binary decision between robo and human is nonsense - “Robo is not Terminator, it’s Iron Man” - and that we should use robo to enhance human, prompting Conference Chair Lawrence Wintermeyer (Principal, Capstone and PIMFA Board Member) to quip “How much human do you want with your financial advice?”
Interestingly, one of the prevalent themes throughout the day was that, whilst the industry will undoubtedly be affected by advances in technology that will be essential for meeting clients’ long-term needs, the Robo/ Human hybrid “is a significant partnership for the future, both in terms of growth and risk management” rather than humans “People and technology competing against each The use of digital channels and tools to create didn’t know they other for future dominance. This was first and enhance customer engagement needed an iPhone promulgated by Dr. Manuela Rabener, is an increasingly stimulating subject Chief Marketing Officer and Co-founder because of the diversity available, until they had one, UK, Scalable Capital who, whilst stating including social media, digital marketing so don’t be afraid to that “wealth management does not and virtual reality. Alexander Maresch, innovate”. figure hugely in terms of technology at the Global Head of Brand/Head of Marketing, moment but this is an opportunity”, went on DWS Group, talked through his company’s to suggest that, by 2021, around $1 trillion will approach to digital marketing using the be managed by Robo advice. social media space and gave some interesting insights, such as the fact that, in many ways, Developing this theme, Henry Macleod, UK Digital Wealth he regards their YouTube channel as one of their most from BlackRock, stated that digital wealth management important outlets, allowing the use of ‘infotainment’ as an is not just an opportunity but “more a responsibility”. His engagement tool. As an example, his video of the DWS presentation proposed the idea that, in an undoubtedly Chief Information Officer overview achieved over nine changing financial environment, there is a shift away million views on organic (unpaid) search. He also favours from single product performance towards solutions using WhatsApp for communicating mobile-ready content based on goals and outcomes. Further, in a world where to clients and believes that the use of virtual reality, in a consumers are very used to having a raft of digital tools similar way to the method used by estate agents to “walk to do everything, hybrid is getting the most traction. one through a house”, will become widespread. However, he also highlighted that 71% of UK adults have
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This topic also provided a new business strategy buzzword – “Amazonisation”. This term comes from the example of the travel business – the idea that travel agents are fast disappearing as a result of tech-based ‘one-stop’ shops, a model that Amazon helped to create. Amazon & Google incorporate full-journey mapping for both customers and employees as an important tool in a strategic approach to digital transformation in the wealth management and financial advice space. In a world where digital ‘phones drive brand awareness, disruptive technology is now mainstream and Artificial Intelligence-enabled tech now sits front and centre: “Data is the new oil”. In a bid to showcase exciting new talent and innovation in the industry the PIMFA conference saw the four winners of our FinTech Competition present their solutions for the future of the wealth management space.
CTO/CIOs needs to be addressed as structural change of this type needs to be holistic in nature, requiring culture, business and technology to work together. Emphasising the thought, PIMFA’s own Giulia Lupato stated that often “the weakest link in any network is the ‘organic interface’” (i e a human!), so behavioural analysis is an incredibly important tool throughout any business as human resources in evaluation, follow-up and enforcement are critical. Cyber Security and Data Privacy are always a hot topic these days, further highlighted by the growth of Artificial Intelligence and Machine Learning. These two were described as fulfilling the function of “benchmarking ‘Normal’, then searching for ‘Abnormal’” but there was also concern that these systems, at least at present, need constant updating and their best use is in advising human Incident Teams, although this will improve over time. There was also a warning over home smart devices s that are relatively easy to hack and present a threat unless they are isolated from other, more sensitive systems.
The first of these, Envizage, suggests that currently digital propositions are falling short because they are largely ‘preaching to the converted’. Their solution is a holistic, multiple-option, forward planning advice engine which A sector of predicted growth was RegTech, especially in simulates ‘real-world’ risk, helping to answer the question the areas of know your client (KYC), digital on-boarding of clients and money laundering. Here, the “how likely am I to be able to do the things advantages of Blockchain were discussed I want in the future?”, such as buying a in terms of improving and speeding up the house, affording to have children and process of KYC on-boarding as the use of planning for retirement. “We should passports, driving licences and utility bills is have a central now somewhat outdated and that its use Neotas presented their enriched repository of data into in the search for anti-money laundering due diligence tool in light of the anomalies would inevitably improve upsurge in criminal activity as which companies can the KYC process. Panellist Pawel currently, if there is no arrest and ‘plug’ to get the necessary Kuskowski, CEO and Co-founder of no conviction, there is no record information and Coinfirm, went further by saying; “we and existing sanctions lists, which Blockchain can help should have a central repository of data are updated infrequently, are therefore into which companies can ‘plug’ to get the incomplete. Cygnetise showcased their with this” necessary information and Blockchain can decentralised application built on the help with this” blockchain, which aims to solve the pain of managing Authorised Signatory Lists, The Financial Conduct Authority are heavily making them more secure and efficient as it digitises the entire process and does the screening in involved in this particular area of debate and have been real time, thereby “saving resources, money, time and exploring how digital can help make regulatory reporting, more accurate, efficient, consistent and cost-effective. emotional heartache”. They have also been reviewing how they gather data and Finally, Enforcd presented their global regulatory intelligence the integrity of that data, developing an advanced, Cloudplatform, allowing their clients to prove that they’re up to date based analytics platform and are ever more involved in with current regulatory requirements, leading to increased international cooperation on RegTech. Nick Cook, FCA’s efficiency and happy clients and regulators. Continuing Head of RegTech and Advanced Analytics, highlighted three the hybrid strand, this platform tracks over 400 regulatory areas where RegTech really helps; supporting regulatory compliance, improving and modernising Regulators and sources, checked by both technology and humans. the reformation and re-engineering of regulatory systems, Considerations around the use of behavioural economics and stated that the FCA is an engaged participant in the and analysis to deliver better financial behaviour in overall sector. consumers was another theme for the day. Essentially, Behavioural Economics helps to understand the reality of In terms of a future model of what wealth management what people decide to do and why they decide to do it, might look like, David Brear, the Global CEO of 11FS, from an emotional point of view, and how emotion impacts summed up the sentiment of the day, saying ““The financial decisions at any and every level. The panel of Babylon/NHS experience – essentially the digital delivery experts cited the MiFID II ‘10% rule’ as an example where, of human expertise - is a perfect example of what’s if a client’s portfolio value drops by 10% or more, their needed. Technology can analyse far more information far Adviser must send them a ‘Don’t Panic’ letter. They felt that quicker, in a model to satisfy clients’ needs, personality this would, in fact, be likely to cause some clients to panic and aims and has the momentum of a supertanker – a bit and that trigger-point communications at earlier and lower slow, but inexorable” loss levels might be more appropriate when taking a client’s emotional makeup into account. Nigel Ross-Scott The role of the individual in a firm’s digital transformation was further discussed, with experts suggesting that, to achieve success, parochialism between CEOs, CFOs and
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Respondents
Suitability - Is Everything Under Control?
Second-line reviews of client files to assess suitability All the large firms, slightly less than half of small firms, and slightly more than half of medium sized firms, said their second line compliance team conducted client file reviews for suitability.
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Suitability continues to be the number one conduct risk for most UK wealth management businesses. A lot has been written about the evidence you need on a client file to demonstrate suitability both at the outset and on an ongoing basis.
We also asked what they consider the main purposes of their second line monitoring to be. Overall, two thirds of firms agreed that validating effectiveness of first line controls was a main purpose – albeit only half of the small firms (with the others not having any first line client file checking regime to validate). About half the firms who responded said that their second line compliance team looked in depth at issues identified through first line checks (e.g. a deep dive to investigate an issue, or testing whether it affects a wider population). Some of the medium and smaller firms said that the compliance function carries out all the client file suitability reviews in their firm.
Our survey The survey focused on discretionary and advisory portfolio management and we received 30 responses. Between them, they have AUM of over £200bn and employ over 600 investment managers, representing a significant proportion of the UK wealth management industry. The types of controls firms should have depends on the scale and complexity of their business, so we divided our respondents into three size categories: five large, 13 medium and 12 small, as shown below.
First line reviews of client files to assess suitability
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Do you review client files for suitability in the first line?
We asked: ‘do you review client files for suitability in the first line?’ Unsurprisingly, all five large firms said ‘yes’. The results suggest that smaller firms are more likely to rely on peer reviews, rather than using a dedicated QA resource – with the reverse true for larger firms. Even so, some large firms do use peer reviews in addition to a QA team. It seems that peer reviews play a significant role in some firms’ suitability controls, so it’s worth considering whether they are effective in testing evidence of suitability. In our experience, they can be effective if they are supported by a robust governance process, rather than ‘mates marking each other’s homework’. More surprisingly, as shown below, medium firms are no more likely to have first line suitability reviews in place than small firms – slightly less than half in each case. It’s worth noting that about half of the medium/small firms who answered ‘No’ indicated that they do conduct some client file reviews, albeit that they rely on the compliance function. In our experience, it’s usually better to encourage the front office to take ownership and responsibility for the bulk of client file reviews, especially as firms get larger, and take on more clients.
Key/ Base:
Small firm
13
Medium firm
5
Large firm
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Eight firms told us they do not conduct client file reviews for suitability in the first or second line – four small and four medium firms. We also asked firms what their minimum number of first line and second line client file suitability checks is per investment manager or adviser. Apart from the eight firms that don’t do any regular client file reviews, another three firms indicated their regime does not attempt to cover all advisers in the firm within a given period, but relies entirely on risk-based and / or thematic sampling. So overall, 11 of the 30 firms don’t require all advisers to be covered by regular first or second line client file reviews. In our view, it’s difficult to see how you can evidence that the service and mandate you’re recommending for your clients is consistently suitable, or that advisers are doing their jobs properly - without reviewing some client files. For example, how do you know whether the client information on file is sufficient to evidence suitability of the recommended service (e.g. bespoke discretionary) and strategy (e.g. your conservative strategy)? How do you test the ongoing performance and competence of your investment managers or advisers? And how do you know whether your regular client information refresh process is being done to the required standard?
6 Validate effectiveness of first line checks
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4 9 Risk-based sampling based on issues found by first line checks
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6
5
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More firms told us they do risk-based sampling (e.g. focusing on certain investment managers who are seen as higher risk), or thematic sampling (e.g. certain types of clients). But, judging by the numbers, some firms were thinking wider than client file reviews – e.g. risk-based monitoring to test whether portfolios were being managed in line with the house asset allocation model.
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But rather less has been written about the governance and controls that firms use to check that the selected service and strategy is suitable for clients, and that portfolios are being managed in line with the given mandate.
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The only suitability file reviews carried out by the firm No
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Controls over the periodic refresh of client information to evidence ongoing suitability
Our question was – ‘If the FCA asked, who would you say has responsibility for suitability in your organisation?’
Our survey asked respondents how confident they are in the effectiveness of their KYC refresh process for ongoing suitability purposes on a scale of 1-5. We asked them to take account of the quality of the periodic client reviews in their rating, not just whether they happen on time.
A lot of respondents (who were mainly compliance officers) pointed to the Chief Executive, either in isolation or in combination with someone else. You could argue the CEO is ultimately responsible for everything at the firm, but if their ‘ownership’ of suitability means anything, they need to be close to the subject and engaged with everything that’s going on.
Most firms selected within a range of 2-4. Smaller firms seemed to be less confident than larger ones. From the comments explaining their ratings, it seems that most firms now have some kind of tracking / reporting process in place to identify late reviews and to chaseup investment managers where necessary. But there are rather fewer who are confident they’ve got a good handle on the quality of those reviews, and the associated records. Here’s some examples of comments from respondents explaining their concerns: “Some IMs have too many clients, and it’s hard for some to apply the same standards to all of their clients”; “It depends on how conscientiously IMs update KYC information. Some are better than others and we do not check all updates”; “The new MiFID II requirement to assess suitability recommendations (for advised clients) at least annually creates a ‘hard limit’ which will not always be adhered to (e.g. client defers, adviser is ill etc.)”.
Consequences for investment managers who fail to evidence suitability of portfolios We asked about the consequences for staff who consistently fail suitability checks, covering results of both file checks and monitoring of portfolio content against mandate. Only about a third of respondents mentioned that their regime could have an impact on bonuses or a remuneration claw-back mechanism. Indeed, a few firms seemed to impose no consequences on advisers or IMs at all, other than to remediate the client file where necessary. Some of the smaller firms said they’d never had anyone consistently fail client file checks (possibly because they rarely conduct any such checks!) Most firms mentioned a range of possible measures like increased monitoring, re-training, escalation to senior management, HR performance reviews, suspension and termination.
Nothing or just remediate the file Increased monitoring
Suspension HR performance review Impact on remuneration Escalation to senior management
Some firms pointed to a specified front office senior manager (such as the Chief Investment Officer, Head of Wealth Management or Head of Advice). Overall, the majority of firms are placing the responsibility with the CEO and / or the front office. In our view, whoever heads up the front office would be a logical person to take ownership, and we definitely don’t think it should be Compliance. Ideally, responsibility should sit with a single person / role, rather than split between two or more individuals.
Key takeaways from the results We think there are four main takeaways:
A significant number of small and medium sized firms don’t appear to be reviewing (enough) client files to evidence consistent suitability standards
Whoever it is, it’s important that they understand and agree that they’re responsible, and that they see regular MI to understand what’s happening and exercise oversight effectively. Many firms say they report MI to a specialist committee, such as compliance committee, suitability committee, conduct risk committee, investment committee, governance committee etc. About half of MI from first line suitability controls is viewed by front office management and the same proportion is seen by a specialist committee. For second line checking by the compliance function, it usually goes to Exco / Manco / Board – exactly what we’d expect to see.
Some firms have not yet directly linked suitability standards to adviser / IM remuneration and incentives
Neil Walkling, Managing Consultant, Bovill
Re-training
Many aren’t confident that their periodic KYC refresh process is consistently effective in evidencing ongoing suitability
Termination
Who is responsible for suitability in your firm? We’ve looked at controls over suitability, and the consequences for front line staff if they consistently fail to evidence suitability. But who has ultimate responsibility for suitability in your firm? A topical question given the extension of the senior managers’ regime to investment firms.
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And as the Senior Managers Regime approaches for investment firms, many of them need to agree who should own suitability in the firm.
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The NMBA Apprenticeship Programme Due to the increasing demand for advice, and adviser numbers reducing, the greatest challenge that the financial advice profession faces over the coming years is having the capacity to serve customer demand. In the late 1980’s, the industry was made up of banks, insurance companies, tied-sales organizations and IFA firms, with over 250,000 advisers who served a large proportion of the public. As the industry evolved, the number of advisers reduced. Then, in the approach towards the Retail Distribution Review, numbers reduced further due to increased regulation, increased costs and higher qualification levels. However, the ultimate issue that this has led to is the industry’s inability to serve customers to the same level as before. The total number of financial advisers in the UK is now around 23,500, which is less than 10% of the number in the 1980’s. Advice was also, previously, more transactional than it is now, meaning that each adviser supported more clients, as lower regulation allowed less time to be spent with each client. This has changed since the RDR, and advisers are now serving a finite number of longer-term clients, to whom they provide an annual service. When you couple less clients per adviser with much lower adviser numbers, we are now serving far less customers than we used to.
We need to address the issue around adviser numbers and replenish numbers within the profession in order to meet consumer demand. We also need to look at alternative solutions to serve customers, who perhaps don’t need full face-to-face financial advice. The FAMR highlighted the “Advice Gap” as an issue of advice supply in the UK, and looked at ways in which financial services could serve more customers more effectively. Technology solutions was one potential area highlighted, and the FCA “sandbox” initiative allows robo-providers to test their products in the market under the regulator’s supervision.
The total number of financial advisers in the UK is now around 23,500, which is less than 10% of the number in the 1980’s.
Will this trend continue? The average age of our 23,500 advisers is around 55, which means that roughly half of the current adviser population will be over the state retirement age in ten years. If these advisers choose to retire, we will be left with only 12,000 from our current pool of advisers, plus any more that join the profession. This has to be a focus. This continual decline in adviser numbers will impact customers and also those working in the profession. Firstly, the public will be affected due to the limited number of advisers to serve them, they are likely to struggle to find advice which will, in turn, push them towards making their own financial decisions, causing significant financial detriment and making them susceptible to scammers and fraudsters. This has already been acknowledged by the regulator and HM Treasury with the use of the term “Advice Gap” and the Financial Advice Markets Review (FAMR) attempted to address this.
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Secondly, financial advice firms who want to grow and expand will struggle to recruit new staff. If a firm wants to recruit an experienced adviser, they are likely to have to offer a significantly higher pay package, which then leaves a gap in the firm they leave. This would then continue from firm to firm and although financial advisers may end up being paid more, these costs will inevitably need to be passed on to clients, therefore increasing fees.
Increasing adviser numbers is a major issue for the sector, which we have been trying to address for years with no obvious solution becoming apparent.
Training and development of financial advisers was much more abundant in the past than it is today. Banks, insurance companies and tied sales operations all ran programmes which recruited new advisers, teaching and coaching them in the skills required. Only a handful of programmes still exist within some major networks for recruiting unqualified advisers, plus a small number of providers have recently created their own direct sales channels. These will help with increasing the number of advisers, but on a much lower scale than they helped in the past.
The new apprenticeships regime could be the best option we have had in years to replenish the profession with the next generation of advisers. An apprenticeship offers ‘on the job’ training with ‘off the job’ learning. On the job training is provided by the employer and off the job training provided through a training provider such as NMBA and, upon completion, the apprentice would have received all the relevant knowledge, skills and behaviours to be a qualified adviser. A new government apprenticeship regime started in April 2017, funded mainly through a levy imposed on large employers, and is available to unqualified, new or existing employees under 65 years old. The government requires non-levy paying employers to make a 10% contribution towards the cost of the apprenticeship training and they will pay the remaining 90%. There are also some financial incentives for apprentices who are aged 16-18. In February 2018, the NMBA launched its Apprenticeship Programme, which is a significant development for the advice profession, and we are proud to be the only training organisation specialising in financial advice to be able to offer this entry route into the profession. NMBA have over 60 apprentices on their programme and aim to bring around 80 apprentices into financial advice each year. There is also a high level of interest in Paraplanning apprenticeships so, although we don’t currently offer apprenticeships in this discipline, we are looking into options for this for 2019.
Tom Hegarty, Managing Director, NMBA
Of course, small adviser firms could just recruit and train their own staff; however, there are some concerns and challenges that firms have identified around this route. Many firms don’t have the expertise or even know where to start. The time and cost required are also often a challenge, especially where firms have a concern that once they have put the cost and time into training, their trainee could leave. The only real way to mitigate against this risk is treating their trainee so well that they don’t want to leave, and providing incentives for the trainee once they have qualified, like pay increases, clients or business equity.
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Our Mission
What Do I Get For PIMFA Membership
Our mission is to create an optimal operating environment so that our member firms can focus on delivering the best service to clients, providing responsible stewardship for their longterm savings and investments. What We Do
Influence
Participation
Events
PIMFA engages with and lobbies policymakers to develop an appropriate regulatory framework, thus creating an optimal operating environment for our member firms
PIMFA members can actively engage in several committees and working parties that cover key topics including Regulation, Retail Markets, Financial Crime and Taxation
PIMFA members can attend over 60 events per year, including CPD seminars and Webinars, Regional Briefings, Technical Conferences and the flagship Annual Summit
Access
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PIMFA members have full access to briefing documents and other guidance notes in the Members Area, as well as to data relating to the MSCI Private Investor Indices Series
PIMFA offers expert and confidential guidance on the myriad regulatory, policy and compliance challenges faced by the industry through our in-house Regulatory, Policy and Research teams
Member Directory Improve your firm’s visibility by featuring in PIMFA’s member directory, with attracted more than 73,000 visits in the last year alone, and list your events in our industry pages
Represent the diverse range of firms in the investment and financial advice industry with a unified voice
Be the undisputed industry thought leader, consolidating our extensive technical insights and expertise in research and policy work
Lead the debate on policy and regulatory recommendations to ensure an optimal operating environment for firms and clients, maintaining the UK’s position as a leading global centre of excellence
Through our advocacy work, we promote the industry as a key catalyst to develop a culture of savings and investment in the UK
Network
Information
PIMFA provides an industry platform for members to engage with peers through our wealth of social and promotional activities, including our Women in Wealth event series 34
Members can stay updated via PIMFA’s publications including the fortnightly Bulletin e-newsletter, technical bulletin Update, in-house magazine Journal, and other research
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For more on members benefits or to become a PIMFA memeber visit us at: www.pimfa.com or email: membership@pimfa.co.uk
Promote a greater understanding of the sector and its role as a beneficial force in transforming the way people save and invest for the future
Facilitate dialogue across industry stakeholders, whilst developing bestpractice guidance
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The Personal Investment Management & Financial Advice Association