The Personal Investment Management & Financial Advice Association
JOURNAL
Featured Topics: The Future of Suitability for Wealth Managers Cybersecurity Cyber Risk Management ESG Uptake and Regulation The New Era of Wealth Management FCA’s Updated Financial Crime Guide The Big Millennial Shake-up FCA Competition Worries
SUMMER 2019 Building Personal Financial Futures
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I am What I am!
The Rise of Environment,
Regulating the Growth of
Suitability and Surveillance for
Cyber Risk Management:
Emerging C-Level Views on
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Social and Governance
ESG Investing
Wealth Managers: What Does
Cybersecurity is Different
Success Strategies for Surviving
Beyond Encryption
(ESG)
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the Future Hold?
to IT Support
and Thriving in a New Era of
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Morningstar
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Wealth Management
NICE Actimize
Mitigo Cyber Security
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PIMFA
Orbium
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32
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40
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Why the FCA’s Updated Financial
Financial Worries and Your
The Big Millennial Shake-
FCA’s Competition Worries
Hacker Girl Episode 7
What Do I Get For PIMFA
Crime Guide Sets Out a Universal
Wellbeing
up: How Tech Made Wealth
Will Impact Wealth
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Membership
Governance, Risk Management
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Advisers Wake up
Managers
The Risk Management
and Compliance (GRC) Framework
PIMFA
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Group (TRMG)
Focus Solutions
Altus
---Mitratech
I am What I am!
Every single day of our lives we deal with IDENTITY, whether proving to others we are who we say we are, or verifying that others are who they claim to be!
such as LyreBird, who have demonstrated how, within minutes, artificial intelligence can synthesise our voices to an incredible degree of accuracy and concerns are raised!
Our mobile device suppliers have sought to streamline the process through biometrics with a mathematical representation of our face or fingerprint stored locally on the device to act as a gatekeeper!
Email fraud
Recent research has shown that UK SME’s are losing more than £9bn through invoice fraud every year. Invoice fraud happens when a company or organisation is tricked into changing bank account payee details when criminals pose as regular suppliers to the company or organisation and make a bogus request for bank account details to be changed.
According to Apple, ‘the probability that a random person in the population could look at your iPhone or iPad Pro and unlock it using Face ID is approximately 1 in 1,000,000’ yet my eldest son can open the iPhone Our flag is of his younger brother of 3 years, using Face ID! our identity, and
Putting words in our mouths
In July last year the FBI reported that global Business Email Compromise (BEC), another similar form of email fraud, would exceed $12 Billion in 2018!
we can’t disrespect or let anyone else disrespect our identity. Gautam Gambhir
When dealing with our colleagues, friends & family, we are highly likely to trust our ability to recognise their voices. Yet, when dealing with our clients, we must exercise a much higher degree of caution whether communicating on the phone or via email.
Although technology brings opportunities for fraudsters and criminals to hijack email traffic carrying sensitive details, it can also be used to address such misgivings by adding advanced levels of control and audit over electronic communications.
Just recently, a BBC reporter successfully fooled the voice ID authentication service of a high-street bank when his non-identical twin was able to access his account. Couple this with the advancements being made by Google’s DeepMind Wavenet project alongside others
The ability to verify that an authenticated ID has received and opened an email and its associated attachments can be very powerful, as can the ability to fully revoke an email inadvertently sent to the wrong party!
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‘GDPR One Year On’
Did you know… over 280 Billion emails are sent and received each day!
Within the last few days, the BBC have broadcast ‘GDPR One Year On’ a documentary focusing upon the lack of transparency our devices exhibit daily, sharing data with multiple parties all over the world; the emphasis on exercising caution and control over our communications has never been greater. The show includes interesting insight into customers exercising their rights under GDPR in the form of Subject Access Requests (SAR’s). SAR’s allow an individual to request that a company provides all information held in their name. Many companies are yet to consider how they comply with such a request as clearly the delivery of such sensitive information must be accomplished in such a way as to comply with the GDPR; specifically they must securely deliver the sensitive data to a correctly identified individual! The Senior Managers Regime (SMR), which came into effect in March 2016, is a part of UK financial regulation aimed at increasing personal accountability of senior people in the financial services industry. Data issues, such as those noted above, are captured within this regime so Senior Managers may find themselves responsible for any failings in the context of SAR delivery. As such the question we must ask ourselves when communicating is “How do we secure such information whilst taking a robust approach to the dilemma. Paul Holland, Beyond Encryption CEO https://www.beyondencryption.com/
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The Rise of Environment, Social and Governance (ESG) Climate change is now the mantra by which we will live our lives for the foreseeable future. Whilst the drive to minimise its effect must certainly be led by government, the financial sector has a huge part to play in this process and lately there has been a significant rise of interest in both the subject and the substance of ESG as an investor tool.
The conclusions drawn from the study are equally interesting: there needs to be greater clarity surrounding the language of ESG, clearly differentiating between ESG, sustainable and responsible investing on the one hand and ‘impact’ or ‘ethical’ investing on the other.
Education is also high on the agenda. Industry-wide, the mid 2018 was a to long-term benefits of ESG To date, the demand for record year for us need to be highlighted. The assets to be mandated as we continued to priorities for most investors to integrate ESG are safeguarding wealth within the investment engage with companies or maximising profits process has been on a broad range of issues... and they need to be led by institutional The increased figures reflect reassured that wellinvestors but now the the higher standards we advised ESG investment conversation is widening expect companies to can enhance their returns, to debate how the base adhere to leading to an inflow of capital can be expanded to include for businesses committed to the retail sector. combatting this challenge. A recent study by Invesco has contributed to this debate by assessing how But this process needs to be directed not just well different generations of retail investors at retail investors but their advisers as well. understand responsible and sustainable CFA UK (Chartered Financial Analyst UK) is set investing and the level of interest for this within to launch a new qualification in ESG investing (i) for investment professionals later this year, the retail sector, with some interesting findings. recognised and supported by the Principles for Initially, at least, awareness and understanding Responsible Investment (PRI). Its launch is a of the terminology involved in ESG appears to response to the surge of interest in ESG investing be lacking. As an example, the study repeatedly over the past few years and aims to provide found that interviewees thought that ‘responsible’ investors with better education, guidance and means ‘risk-free’. This confusion seems to standards around the subject and will be the first affect advisers as well as investors, with many formal qualification on ESG investment available associating ESG, along with sustainable and sector-wide to investment professionals in the responsible investing, with ethical investment UK. A pilot exam, with professionals from firms and assuming that this will have a serious drag on including HSBC and vanguard, is scheduled for performance, causing a degree of apprehension early September with the first official open sitting for the exam available from December 1st. as to the profitability of this approach.
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Industry recognition of this necessity is also growing. Simon Jack, the BBC’s Business Editor, wrote recently that the largest money manager in the UK – Legal & General Investment Management, who look after £1 trillion worth of UK pension fund investments – have totally embraced the philosophy, expressing the belief that businesses around the world must address climate change urgently or face the ultimate sanction for a public company – shareholders who refuse to back them any longer. (ii) Their methods are indicative of where we could be headed. In 2018, the company voted against the re-election of almost 4,000 directors, an increase of 37%. That included votes against over 100 Board chairs on the basis of gender diversity alone. Their Director of Corporate Governance, Sacha Sadan, explained: "2018 was a record year for us as we continued to engage with companies on a broad range of issues, using our voting power to influence change on behalf of our clients. The increased figures reflect the higher standards we expect companies to adhere to". A snapshot of the future corporate environment?
i) To read more on the CFA UK Certificate on ESG Investing, please click here. ii) To read Simon Jack’s article in full, please click here. iii) To read the full debate in which Sir Ed Davey spoke, please click here.
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With the increased attention will undoubtedly come regulation. Sir Ed Davey, MP, formerly Secretary of State for Energy and Climate Change under the Tory/Lib Dem coalition, recently spoke in a Commons debate, saying “We need to make capitalism our servant, not our master, and that comes from laws and regulations in this House”. He continued by proposing a five-point plan to “systematically decarbonise capitalism and tackle the disinvestment and investment challenge of the pension funds”, calling, amongst other things, for mandatory disclosure by fossil fuel companies on how much carbon their business plans would see emitted, coupled with a legal requirement to show how they will become compliant with the Paris Treaty.
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On the European front, regulation is undoubtedly being planned. On March 7th the European Commission welcomed the political agreement reached by the European Parliament and European Member States on “new rules on disclosure requirements related to sustainable investments and sustainability risks”. This latest EU development represents a major milestone from a regulatory perspective. The new regulation, once finalised, will aim to provide consistency across EU member states by clarifying that duties require investors to consider financially material ESG factors in their investment decision-making. On 24 June 2019, in Brussels, the European Commission hosted a stakeholder dialogue on the progress and outcomes of the Technical Expert Group’s (TEG) work on sustainable finance. The event was the perfect occasion for interested stakeholders to discuss the TEG’s final report on the EU taxonomy, the final report on the EU Green Bond Standard; and the interim report on climate benchmarks. These TEG-reports were then published on 18 June 2019. The final report on taxonomy and the interim report on climate benchmarks will be accompanied by a call for feedback. In addition, at the same time, the Commission will publicly launch new guidelines for companies on how to report climate-related information. These guidelines are built on the proposals made by the TEG in January 2019. ESG is not, on its own, an answer to climate change. It is, however, a potentially critical part of the solution. If it is shown by trained and experienced advisers to produce the returns which retail investors seek, we could be on the verge of seeing true progress in an area where little of substance has been seen to date. PIMFA: https://www.pimfa.co.uk/
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are being revised to embed sustainability risk considerations into the investment decisionmaking process.
Regulating the Growth of ESG Investing
Europe’s efforts to align ESG regulation across the spectrum of investment vehicles is to be commended. However, we are concerned about proposals that would require asset managers to report on the extent to which sustainability risks are expected to impact returns. This question is a subjective matter and may confuse rather than enlighten investors.
A look at the landscape of ESG regulation around the world, across three main areas The growth of environmental, social, and governance investing has been astronomical over the past few years. Our latest report, “The Evolving Approaches to Regulating ESG Investing,” shows that investments in European and U.S. ESGoriented funds increased 44% between the end of 2014 and the end of 2018, reaching a total of EUR 761 billion (further detailed in the Morningstar Sustainability Atlas and U.S. Landscape Report). This growth naturally leads policymakers to examine a spectrum of ESG regulation and policy interventions to facilitate sustainable investing.
In sharp contrast, the majority of ESG regulation in the U.S. has emerged as a result of the Employee Retirement Income Security Act of 1974, which largely governs retirement advice. This act placed restrictions on economically targeted investments, which has effectively been applied to ESG factors, and therefore blunted the availability of ESG strategies as part of retirement plans.
In this report, we explore the scope of these interventions across three broad areas and how regulators’ ambitions vary by location.
In other words, in the U.S., ESG selection must be justified by explaining why it is necessary for an investment, while in Europe it must be explained why ESG factors are not considered.
ESG regulation in investment management and advice
ESG regulation in disclosure and governance
European policymakers have been at the vanguard of this effort with the European Commission’s Sustainable Finance Package of Measures, the multiple elements of which continue to move through the legislative process and are expected to be adopted this summer. This package includes amendments to the Markets in Financial Instruments Directive (known as MiFID II) and the Insurance Distribution Directive that would require advisers to establish their clients’ ESG preferences during suitability assessments. Along with the changes to MiFID and IDD, the Undertakings for the Collective Investment in Transferable Securities Directive and the Alternative Investment Fund Managers Directive— Europe’s overarching investment fund rulebooks—
Stakeholders should have access to a gamut of information, including a product’s approach to sustainability in its selection of investments, if and how its managers engage with their investee companies, how managers vote on shareholder resolutions, and how a product performs against its objectives.
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Though these standards of disclosure are currently highly fragmented, it’s a positive step forward that most recent regulatory proposals include a “comply-or-explain” clause. These proposals will increase the likelihood that investors will have access to more-complete information about products’ ESG credentials.
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Examples of ESG regulations around disclosure and governance include: ◆◆
The European package’s new regulation on disclosures, which should help align standards across investment, insurance, and retirement products. Encouragingly, given both the longer time horizons and that it is the channel through which most people invest, the retirement segment is furthest down the track.
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Existing and upcoming rules in Europe and the U.K. require disclosure of how products weigh ESG considerations, as well as their policies in relation to the stewardship of investments.
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In the U.S., the SEC has long required disclosure of votes on shareholder resolutions. Steps that shed additional light on these activities and on engagement policies can be valuable for investors.
Indeed, it’s very likely that raising the bar in one country will lead others to increase the quality of their disclosures.
ESG regulation toward a sustainability investment language Without a level playing field, it can be difficult for investors to compare products and determine what constitutes a sustainable investment. Worse, this lack of standardization heightens the risk of green-washing, where products might exaggerate their ESG credentials. The good news is that several groups have been looking for solutions, including nonregulatory bodies. For instance, the Task Force on Climate-related Financial Disclosures and the Sustainability Accounting Standards Board have developed qualitative and quantitative industry-specific disclosure standards. International standardization is potentially more important in this area than in any other aspect of sustainable investment regulation. Convergence of these workstreams into a common sustainable investing language can play a vital part in ensuring investors can assess competing products fairly. Well-designed ESG regulations can provide a strong platform for continued growth, and it’s reassuring to see activity in this area. With more-consistent standards in place, products are likely to be comparable and understandable to investors, and costs are likely to be lower. Ben Johnson, Director, Passive Strategies, Global Manager Research http://www.morningstar.co.uk/
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one in four firms still handle suitability manually, while 76% use a combination of technology and manpower.
Suitability and Surveillance for Wealth Managers: What Does the Future Hold?
Across Europe and Asia, the term suitability seems to be as popular as the tongue-in-cheek reference ‘Brexit.’ With the Financial Conduct Authority (FCA) in the UK leading the charge, regulators are consistently reevaluating their expectations and often causing uncertainty in the marketplace. From 2017 to 2018 the FCA alone assessed 1,142 cases in 656 firms and said it was "disappointed" to find the advice sector provided "unacceptable disclosure" in 41.7% and "uncertain disclosure" in 5.4% of the reviewed cases. Although feedback was provided to the evaluated firms, the UK regulator is expecting greater progress. According to its more recent annual report, The Financial Conduct Authority (FCA) plans to reassess the suitability of advice in 2019, with an emphasis on customer disclosure.
and using technology to augment compliance personnel – but they’re still not meeting the expectations of regulators.
It’s not surprising then that suitability remains a serious concern for wealth managers. In a recent research study, benchmarking firm Compeer found that wealth managers still view suitability compliance as a major issue. Forty-four percent of respondents reported increased compliance costs as a direct result of carrying out ongoing suitability testing. Despite this, one in four firms still handle suitability manually, while 76% use a combination of technology and manpower. On the surface this dynamic is difficult to explain. Firms are spending more money on compliance
In fact, according to PwC’s 2019 Surveillance Survey on Market Abuse, most firms are not satisfied with their legacy eComms and voice surveillance solutions. A key component of this dissatisfaction is related to the extremely high number of false positive alerts that these legacy systems generate, which in turn eat up valuable compliance time and resources. The PwC Survey further concludes that in Europe fewer than 0.01% of alerts lead to a Suspicion Activity Report, which globally translates into around 1 out of every 29,000 alerts.
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How to bridge the gap? The answer may lie in changing how wealth managers approach supervision entirely. Sometimes it is not simply about what you do, it’s how you do it. Wealth managers around the globe communicate with their clients on a very personal level. The information gleaned from the emails, chats, and phone calls can be essential to developing a proper investor profile and responding to the needs of individual clients accordingly. But as telling as these communications are, they’re rarely analyzed to the depth required to develop accurate client risk profiles, to determine if information was properly disclosed, and whether investors were adequately educated on all available options. The surveillance technology many firms have come to rely on simply isn’t up to the task.
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These high false positive rates are a direct result of legacy solutions which are lexicon based, inaccurate, and rely on manual processes, such as random sampling of advisor communications. Inaccurate analytics also make it difficult to detect context (which can be complicated even further when multiple languages, accents and specific financial terms come into play). Random sampling is equally problematic. Considering that firms only review between two and five percent of communications, it’s a given that some risky communications are going to fall through the cracks. In the world of wealth management, this can spell disaster.
For example, correlating communication data with alerts might reveal serious compliance issues, such as conflicts of interest, potential conduct and suitability risks, and lack of proper disclosure. Correlating chat conversations and emails with a related commission or a hybrid switching alert could reveal that a communication was above board, or to the contrary, a sign of something sinister.
By far one of the biggest challenges for compliance analysts is piecing suitability alerts and related communications together. Compliance analysts typically work in different siloed systems. Without an automated way to analyze and bring all of the data together, analysts seldom get clear visibility into the actions and intentions of regulated employees.
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in Europe fewer than 0.01% of alerts lead to a Suspicion Activity Report, which globally translates into around 1 out of every 29,000 alerts.
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1. AI for more accurate detection
2. Surveilling all communications
Whereas primitive lexicon searches only provide basic levels of consumer protection, today’s advanced detection capabilities harness the power of AI (Artificial Intelligence) to analyze multi-channel communications and unearth truly suspicious communications, while reducing false positives and compliance risk.
Modern surveillance technology also allows firms to review one-hundred percent of communications, across all communication channels that advisors use – including email, instant messaging, voice and more. Communications can be also be assembled in the proper order so it’s possible to know who communicated what to whom and when. This gives firms complete confidence that advisors complied with regulations around reverse solicitation and didn’t overstep local laws.
The bottom line is that when firms are only able to look at communications and data in isolation, it’s difficult to assess and understand the true sources of risk in the organization.
3. Marrying suitability alerts with advisor communications
If your firm is struggling with these surveillance and suitability challenges there is a better way. Advances in technology can reduce false positives and compliance risk by:
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1.
Applying AI for more accurate detection;
2. Surveilling 100 percent of communications; 3.
Automatically marrying suitability alerts to relevant advisor communications;
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Beyond surveilling communications to proactively address suitability concerns, wealth management firms also need to keep an eye out for market abuse and intent to commit market abuse, in order to comply with regulations like MiFID II. Being able to holistically combine and leverage data and alerts is the next frontier in this area. Holistic surveillance correlates trade data with related voice and communications data, for deep insight and analysis. With a holistic approach, compliance analysts can quickly reconstruct all pre-trade, trade and posttrade activity related to a specific transaction.
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So what does the future hold for wealth management firms as far as suitability and surveillance? The answers won’t be found by applying more manpower to the problem, but rather by applying the right technology. Lee Garf, General Manager, Financial Markets Compliance for NICE Actimize https://www.nice.com
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Cyber Risk Management: Cybersecurity is Different to IT Support
Many financial services firms have suffered the consequences of mistakenly assuming that their IT provider is also looking after their cybersecurity, when in almost every case, they are not. And nor should they be, because IT support and cyber security are different, and independent, functions.
confident are you of demonstrating you took all reasonable steps to mitigate the risk? Independent cybersecurity advice can be a key component in risk/ compliance management and the defence against cybercrime.
Ask yourself the following questions about Cybersecurity is high on the FCA’s agenda. In its your cyber security. 2019/20 Business Plan, operational resilience is identified as a key priority, with disruption from 1. Who is currently undertaking your cyber cybersecurity incidents being one of the biggest security risk assessments? challenges. 18% of all incidents reported to the FCA in the year ended September 2018 were In terms of personal data, if the answer is “cyber attacks”, with cyber security incidents “no one”, you’re breaking the law. The rules also responsible for the other 2 main causes of regarding the security of personal data require disruption (change management and 3rd party you to assess the risks in your systems and have a risk management framework in place. IT problems). In addition, client data, business information, Cybersecurity is a serious business risk and it financial theft and destroyed reputation are all at should be governed just like any other business risk if you are breached. As regards operational risk. The FCA says that all firms must develop a resilience, firms must identify their important “security culture”, from the Board down, and see business assets, including hardware and the extension of the SM&CR as a key driver of software. Technology can be integral to service delivery, so do some business impact analysis. culture. Which services are critical to your operations A material cyber incident must be reported under and how should you protect them? Identify the Principle 11. A personal data breach may be businesses you work with, those you are relying reportable to the ICO. If things go wrong, how upon, and the connectivity between you. Good
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cyber security involves assessing the dangers and potential impacts, and then achieving the right balance between open IT functionality and mitigating risk.
2. Are you complying with your legal, professional and regulatory requirements? A good cyber security advisor will know about your legal, professional and regulatory requirements. They will be familiar with guidance issued by the ICO and FCA.
client personal data and confidential financial information, unauthorised personal device connections, inadequate back up arrangements, lack of encryption, use of unauthorised memory sticks, access to payroll information, etc. The list is long. So penetration testing and scanning, coupled with a regular review through the eyes of a cyber security specialist, will find out where the leaks and open back doors are.
4. Who is doing your cyber security awareness training?
3. Who is pressure testing your technology?
Make sure your staff are aware of the type of dangers which exist, including the current tricks fraudsters are using to gain access to your Security is not achieved simply by having firewalls systems, data, and finances, and the ways in and anti-virus software. Everyone has that, and which staff can stay vigilant to avoid random it does not stop them from being breached (or and more targeted attacks. It is estimated that prevent their staff from clicking the button that more than 60% of breaches are caused by staff installs ransomware). It is a sobering fact that error or staff falling for tricks. Examples include 86% of cybersecurity victims have computer false and impersonated emails, opening dodgy security software in place – but it does not provide attachments, connecting an infected device, or the protection they thought. We usually find that using a weak password. So training is a key the defensive software is not set up or configured part of your defences. Again, this is now a legal properly or that security updates are not regularly obligation so if you’re not doing training, you’re installed. Other common vulnerabilities include breaking the law. unsecure Wi Fi, use of cloud services with weak or no passwords, unintended open access to
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5. Good governance - have you got the right cyber policies and procedures in place? Another important way of defending against cyber-attacks, is by having the correct policies and procedures in place (and it’s another legal obligation). They’re there to protect your organisation, your staff and your clients. They should cover things like the rules on Bring Your Own Device (BYOD), password control, remote working, use of cloud platforms etc. And get your staff to sign for policies, so everyone knows what the rules are and what’s expected of them.
increase your attack surface. And cyber criminals are becoming more sophisticated all the time, with artificial intelligence and machine learning providing them with better tools to attack your business. The FCA says that criminals are increasingly targeting smaller firms as they see them as the industry’s weaker links, providing avenues for cyber attacks and also creating disruption for other firms and consumers. Boards and senior management are expected to take responsibility for managing this risk, and will be taken to task if they fail to do so. Lindsay Hill, Chief Executive
6. Are you paying too much for security? Officer and Legal Counsel, Many people seem to think that buying some additional software will of itself provide additional security. But that is not so. Frequently we find businesses have purchased a patchwork of expensive but overlapping security software, when actually their existing technology has perfectly good protection built in, if only it were correctly configured.
Mitigo Cybersecurity
https://mitigogroup.com/
7. Who is monitoring your security? Your technology and the state of its security changes over time, and the threats you face are constantly evolving. So making your systems secure and resilient is not a one off fix. All of your technology, processes and people need to be continuously assessed to ensure your defences are kept up to speed. And it’s always a good idea to get some independent assurance - don’t ask your IT support to mark their own homework - it’s not fair on them, and it’s not good risk management. As firms become more digitised, they become more exposed to the increasing number of cyber threats. Greater use of the cloud can
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Emerging C-Level Views on Success Strategies for Surviving and Thriving in a New Era of Wealth Management With choppy markets, changing demographics and new technologies, we are firmly in the realm of wealth management 4.0. Future success depends on wealth managers adopting the right strategies, writes Ian Woodhouse, head of strategy and change at Orbium. Orbium is currently undertaking its annual survey of C–level wealth managers and PIMFA asked if we could share some early emerging insights. UK executives report the industry is in the grip of needing to respond to short-term market cyclical and structural megatrends. A turbulent end to 2018 hit most wealth managers hard. Few in the sector are sounding optimistic notes about 2019 given continuing uncertainty over Brexit and fears for global trade. Megatrends such as accelerated technological change are everpresent, alongside ambiguity around forthcoming regulation and changing social attitudes towards wealth and sustainability. This makes it important for the industry and firms to demonstrate how they contribute to society through improving education, supporting socially responsible and impact investing, helping privately held corporate wealth create employment and through providing new retirement solutions. It is a rougher environment and the C-level are developing their agendas to meet several identified short-term pressures and to also reposition, thus allowing them to be future ready for 2022 and beyond.
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They see that traditional advisors must serve an increasingly diverse new customer base and maintain the traditional one using technology and data, all the while navigating stormy waters. So, what do success strategies look like?
New clients, changing needs The industry is restructuring around new value propositions ranging from new robo-advisor models, some offering hybrid remote advisor access through to new face-to-face advisor models for different clients driven by their changing needs, regulation and technology evolution. In the past, it was more of a limited onesize-fits-all product-driven approach. However, this is rapidly shifting towards more solutions and advice-driven propositions, encouraged by regulation and enabled by new technologies. Wealth managers and advisors expect to provide more “living solutions” across their client’s evolution through the accumulation, deaccumulation and wealth transfer cycle. This will be challenging as they need to maintain their current core business to avoid commoditisation and fund innovation to move to future higher value propositions. This will require intelligent solutions enabled by technology. There will also be product shelf rationalisation and development of more centralised investment solutions to provide better and fair outcomes-based solutions, which incorporate more frequent client risk and sustainability education.
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Speed and impact of technology change Making all of this more difficult is the speed of technological change. The client relationship is now a mixture of face-to-face and digital; however, there is a shortage of relationship managers who are comfortable with both. The proliferation of new channels for client service will increase this challenge, making the evolution of the advisor’s role and their development and performance management much bigger priorities. Multiple technology innovations such as cloud Software as a Service, A.I. and new ways of working such as Agile, will provide new options for both traditional and new entrants to better align business advisors with technology platforms to offer clients these new propositions and business models. As multiple technology innovations provide new options, it will become more important to bridge the business and technology divide and make the right choices of businessaligned technology architectures and providers. Wealth managers must ensure they have a plan to address these demographics, serving them via their preferred channel and in a way that is joined up. If they don’t, they risk losing ground to new market entrants and nimbler competitors.
wealth management, asset management, retail and investment banking and insurance as well as from non-financial service players. This will be enabled through a combination of M and A, strategic partnerships and the rise of new wealth ecosystems. Orbium itself is not immune to these changes. In February we were acquired by Accenture, which opens up some exciting possibilities . As part of Accenture, we will be able to draw on expertise in new technologies, from artificial intelligence to data security and the cloud. Meanwhile, Orbium will continue to provide our domain-leading expertise in wealth management business consulting and our Avaloq core-banking technology implementation capabilities. The coming year will bring lots of challenges, none more important than finding ways to update our traditional business and pivot to the new. Ian Woodhouse, Head of Strategy and Change, Orbium https://orbium.com/
Evolution of traditional and new competitors Executives further expect traditional industry boundaries within financial services to reshape and converge. New models are expected across
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Why the FCA’s Updated Financial Crime Guide Sets Out a Universal Governance, Risk Management and Compliance (GRC) Framework In 2018, the Financial Conduct Authority in the UK updated its Financial Crime Guide, adding a chapter on insider dealing and market manipulation. This new material outlines good and bad market practices around the requirement to detect, report and counter the risk of financial crime. It also provides specific guidance on financial crime and gives practical advice on actions firms can take in four areas:
Risk Assessment
For anyone involved in financial services, GRC or policy management, the new guide is an excellent overview on good and bad practices in all four of these categories. We’ll summarise those practices briefly here and provide some thoughts on how they can serve as a framework for an effective compliance program for UK-based financial firms.
Policies and Procedures
Governance
Ongoing Monitoring
Governance The guide identifies four specific bad practices around governance that firms should be aware of, but three really stand out. It makes the point that firms with weak governance tend to share characteristics such as:
Addressing risks is seen as a legal or regulatory necessity rather than a matter of true concern for the business.
These bad practices point to the critical importance of establishing and fostering a culture of awareness, vigilance and compliance. As the guide makes clear, anti-fraud starts at the top. Senior management must be able to recognise and articulate the warning signs that
Senior management considers the firm’s financial crime obligations are fulfilled solely by submitting standard STOR and/or SAR filings.
insider dealing and market manipulation might be taking place. There must be a clear structure for reporting and a clear procedure for handling reported cases, including internal investigations and steps for remediation.
Risk Assessment The guide emphasises the importance of selfassessment when it comes to maintaining a militant stance toward mitigating risk. This includes regularly reviewing the possibility that the firm may be used to facilitate insider dealing or market manipulation. A number of factors should be incorporated into this assessment,
Has the firm considered whether any of the products/ services it offers, or the clients it has, pose a greater risk that the firm might be used to facilitate insider dealing or market manipulation?
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including client types, products, instruments and services offered – and of course, the risks posed by internal employees as well. Helpfully, the guide sets out a number of selfassessment questions to guide this process:
Who is responsible for carrying out the risk assessment and keeping it up to date?
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What framework does the firm have in place for assessing the risk of insider dealing and market manipulation being committed by its employees?
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Firms taking their obligations for ongoing monitoring and enforcement seriously, on the other hand, tend to organize their programs around frank self-assessment and clear next-step actions when suspicious activities arise. These self-assessments include:
Policies and Procedures Regarding policy and procedures, the guide makes clear that an effective anti-fraud and compliance effort must be premised on two principles:
1.
identifying and taking steps to counter the risk of financial crime before any trade is executed, and
It can’t be stressed enough that internal enforcement around insider trading and anti-fraud efforts must be proactive. One red flag seen at firms with lax programs is that policies and procedures cover only post-trade identification and reporting of suspicious activity and do not cover countering the risk of financial crime. Another is that the firm sets apparently robust procedures for assessing and mitigating identified financial crime risk, but
2.
mitigating future risks posed by clients or employees who have already been identified as having traded suspiciously.
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Does the firm undertake enhanced monitoring for high risk clients?
Does the firm’s monitoring cover the activity of any employee trading?
sets thresholds for engaging these measures that are almost impossible to trigger. On the other hand, firms with effective compliance programs in place will make sure that the risk of financial crime is considered throughout the entire lifecycle of a security transaction, including before the order has been executed.
Implementing an effective solution to Counter Insider Dealing and Market Manipulation
the overall effort. The FCG points out that firms that do not take their monitoring responsibilities seriously will often identify suspicious transactions and orders, but won’t investigate them further. And that these types of firms believe that their obligations cease once suspicious transactions or orders are reported.
Many of the more advanced GRC solutions will allow for such automation, but one capability that seems to be a thorn in many people's sides is Policies and Procedures. With the emphasis given from regulators, organisations need to demonstrate not only employee attestation and understanding, but also the effectiveness of policies and procedures.
Ongoing Monitoring “Trust but verify” is a term often invoked in international diplomacy and arms control, but it’s just as appropriate to risk mitigation and policy enforcement. Fostering a culture of compliance that’s anti-fraud and secure starts at the top with solid governance, but it can succeed over the long term only through precise ongoing monitoring of
Does the firm consider its obligations to counter financial crime when a client’s or employee’s activity is determined as suspicious via surveillance systems and subsequent investigation?
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When considering the four elements of guidance around an effective compliance program above, a good governance, risk and compliance program must be automated. This needs to start with ensuring that your executives and employees understand the scope of the challenges at hand, and also the nature and nuance involved in fraud, insider trading and other financial crimes.
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To conclude, it’s important to understand that within any given organisation, policy and procedures have likely been in place for a long time. This does not mean these programs are as effective as they could, and need to be. Deficiencies in technical aspects such as monitoring or shortcomings in control will undermine the overall culture of compliance, and make risk assessment difficult or ineffective. Alternatively, organisations that embrace policy automation can exert far greater control over the most common issues around procedure and compliance to increase visibility into policy-related risks and promote the granularity required by regulators for an effective compliance program. Jason Cropper, Global Head of Commercial - GRC https://www.mitratech.com/
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Financial Worries and Your Wellbeing From time to time, we all face important financial decisions. The triggers for these are sometimes not a surprise – marriage, a first mortgage, the arrival of a newborn child, an inheritance – but occasionally something destabilising comes up that no amount of planning could have catered for – job loss, ill health, a family death. In these sets of circumstance, a decision needs to be made that will deeply affect our financial wellbeing going forward. The stress inherent in the decision-making process differs from person to person, but it’s usually present in some form and, if the individual’s circumstances suddenly become precarious, that stress can easily become a major concern, threatening the wellbeing of the person or people concerned. The mental health charity MIND recently cited financial worry, poverty and debt as potential causes of at least a period of poor mental health. Worrying about money can make one’s mental health worse and poor mental health can make managing money harder. The key here is to stop this cycle turning into a downward spiral and, although many genuinely find it difficult to ask for help, the badly needed assistance is available in the form of financial advice. No matter how far ranging the source of change is, from issues as widespread as inheritance to pension planning, redundancy to health worries, the disruption and the challenge it poses often require complete financial restructuring and the making of critical decisions. Talking to a well-trained, experienced and well-connected financial adviser can provide vital reassurance, reintroduce stability to a fraught situation and give the client confidence in the decisions being taken, thus reducing the stress inherent in the particular situation.
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The link between financial concerns and individual wellbeing – or the lack of it – is now well documented. Whether one is in debt and needs the assistance available at the Citizen’s Advice Bureau or starting a pension through a Financial Adviser, talking to an expert adviser will produce clarity, comfort and achievable goals. Whilst poor mental health problems through financial worry may not go away of their own accord, there are tried and tested ways of solving many of the problems that arise from financial woes. An important first step in dealing with this perpetuating cycle of anxiety, is to remember that you don’t have to deal with all your worries and concerns alone - there are experts available in key areas from therapists to financial advisers. So let’s help fight the stigma together – both when it comes to the term ‘mental health’ and also our innate ‘Britishness’ when it comes to discussing money; we need to start the conversation and break the cycle. PIMFA: https://www.pimfa.co.uk/
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The Big Millennial Shake-up: How Tech Made Wealth Advisers Wake up Do millennials really expect financial advice to be as easy as ordering a curry from Deliveroo, or hailing a cab via Uber? It’s certainly the case that young people are comfortable with using technology to ‘check in’ on their investments, according to a new report from EY. The report found that 61% of people now check investments via a website, and 12% via a mobile app. The report suggests that these technologies are empowering a new breed of young investor, both financially and technologically literate.
The percentage of People now checking investments via: Websites 61%
A recent Deloitte report found that more than half of young people would actually change their bank to get a better tech platform. The report said, ‘They consider technology and online platforms an important aspect of financial advice, 57% would even change their bank relationship for a better tech platform.’
54% of young people hoped to start their own business, and 27% are already self-employed.
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But the report found that while technology can help to engage young customers, face-to-face advice was still important. The report said, ‘84% of millennials seek financial advice, clearly highlighting the fact that the necessity for world-class investment advice is still in demand.’
Mobiles 12%
Tools such as Focus Wealth allow advisors to engage these tech-savvy customers via technology, by simplifying, streamlining and automating previously time-consuming manual processes. Smart digital software that enables wealth management teams, intermediaries and consumers to focus on accomplishing their financial goals with the minimum of effort, executed in a modern, digital and easilyintegrated interface.
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75%
76%
respondents saying they would be willing to attend an in-person financial seminar.
also had advanced financial literacy.
Dave Upton, managing director of Focus Solutions said, ‘It’s about how you deliver financial advice. We have invested in automation, but we’ve always thought we’d end up with a combination of human and technology.’
Ready access to information via technological tools is also giving millennials a new level of financial literacy, the EY report found.
The human touch definitely remains important: research by The Guardian in America found that millennials are actually more likely than any other generation to say that having a financial advisor they trust is important to their financial confidence. Millennials have a different attitude to both work and money than previous generations, with Deloitte saying that 54% of young people hoped to start their own business, and 27% are already self-employed.
Millennials consider technology and online platforms an important aspect of financial advice, 57% would even change their bank relationship for a better tech platform.
The report also revealed that, among those with advanced digital skills, 76% also had advanced financial literacy. Debunking the myths that surround millennials, ready access to information via smartphones isn’t making young people lazy, it’s making them well-informed customers. Tools such as Focus Wealth can facilitate and forecast long-term views of how investments should be made, and how they will turn out.
To these customers, keeping a close eye The EY report concluded, ‘As customers are on money comes naturally. As does using becoming more digitally enabled and gaining confidence, they are becoming more financially technology. literate. There are new opportunities to use Contrary to the idea that millennials are more digital technologies to engage and support these interested in smashed avocado than returns on customers’ financial planning activities.’ their investments, The Guardian report found that millennials were more willing to learn about Steve Andrews, money than any previous generation, with 75% Head of Managed Services, Focus Solutions of respondents saying they would be willing to https://www.focus-solutions.co.uk/ attend an in-person financial seminar.
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FCA’s Competition Worries Will Impact Wealth Managers
Altus Managing Director Kevin Okell warns that wealth managers should expect to be impacted by the recent FCA investment platform study. While the platform industry is bracing itself for a ban or cap on exit fees, and mandated share-class conversions, the wealth managtement sector will need to keep its ears to the ground too. Wealth Managers could be forgiven for believing the FCA’s investment platform market study won’t affect them. After all, the study was focused on the platform sector and didn’t explicitly mention any other parts of the industry. However, a closer look at the areas the FCA is focusing on reveals a different picture. Regulators have traditionally had a keen interest in ensuring competition in the financial services industry. It was one of the founding objectives of
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the FCA when it was created in 2013. Effective competition relies, among other things, on the ability for clients to switch suppliers. In the context of retail investments, the FCA went so far as to enshrine the obligation to do this efficiently in its handbook as COBS 6.1G.
So what is the problem with exit fees? The FCA has singled out exit fees in its interim report as one of the barriers to smooth switching. When the FCA looked at investment platforms, it found that 7% of all consumers wanted to switch but were put off from doing so. Many said that exit fees were a significant hurdle. So competition is not working. After issuing its interim report in July last year, the FCA gave firms until early 2019 to make it easier for investors to switch. They have failed to do that and so the FCA is now
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planning to introduce a ban or cap on exit fees. class conversions are not currently supported, Its consultation on this matter will close on the investors end up having to switch out of an old 14th June. share class and into a new one. In other words, they have to sell and buy again. The costs can If this ban or cap on exit fees were to be applied be significant especially in uncertain market to investment platforms however, it would only conditions such as those we have seen recently. encourage competition within the investment platform sectors. The FCA is therefore expected First, investors would find themselves to be out to roll out a ban or cap to firms offering a of the market briefly, which could prove to be comparable service to retail clients. And that costly. Second, on a unit trust they could suffer includes traditional wealth managers. a loss on the bid offer spread and on an OEIC, if they were unlucky, they might lose out on an And what is the problem with share class adversely swinging single price. And third, they conversions? might also suffer a CGT hit on unwrapped funds. Another barrier to efficient competition is the If a saver has an existing investment in a fund, difficulty investors face when they want to switch has to sell it and then buy a newly available platforms which don’t offer the same share class. share class in the same fund, those risks are The problem here is that, because share
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likely to outweigh the benefit of any discount. It would be easy for them to lose 1% or more, which would take many years to recover from a modest reduction in fees. Fortunately, there is some good news on the horizon. Significant improvements to the open transfer framework will be implemented towards the end of this year and one of the key new features is the introduction of electronic conversion instructions. That means it will soon be possible for restricted share classes to be automatically converted and transferred inspecie rather than sold. Given that COBS 6.1G relates to all firms, it would probably be a good idea for Wealth Managers to take a bit more interest in that platform market study‌ Kevin Okell, Managing Director, Altus https://www.altus.co.uk/
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16 October 2019 etc. venues County Hall, London
Confirmed topics include - Culture & Conduct - The Future of Regulation
- ESG: Implications for Investors & Financial Institutions - What Next For Politics?
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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
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
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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 inhouse 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
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
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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
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
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◆◆ Emerging postBrexit rulebook ◆◆ Building Trust ◆◆ Inter-generational wealth ◆◆ Future Employees, Future Skills skills foresight, careers, apprenticeships, T- levels, diversity and inclusion ◆◆ Financial crime including fraud prevention
◆◆ Accumulation of Regulation ◆◆ Costs of Regulation ◆◆ Financial Services Compensation Scheme (FSCS) ◆◆ Financial Advice Market Review (FAMR) ◆◆ Financial Ombudsman Service (FOS)
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The Personal Investment Management & Financial Advice Association
Would you like to contribute an article? Alongside updates from PIMFA, the Journal includes several useful inputs from our associate member firms. These articles are an excellent opportunity to gain interesting insights into the wider industry and to learn more about PIMFA associate members. If you are an associate member who is interested in contributing to future editions of the Journal then please contact: Richard Adler, Director of Strategic Partnerships (richarda@pimfa.co.uk) or Sheena Gillett, Head of PR & Communications (sheenag@pimfa.co.uk) Journal design by Cicero Printed by Paragon