PIMFA Winter Journal 2023

JOURNAL WINTER

Building Personal Financial Futures

IS SGT PEPPER AN ANTI-HERO? DIFFERENCES AND DIFFERENTIATION

IT WAS TWENTY YEARS AGO TODAY SGT PEPPER TAUGHT THE BAND TO PLAY”

It has also been about twenty years since the idea of Platforms, an online customer-centric hub for financial products, arrived in the UK. The nascent idea was that an adviser could see, and manage, all their clients’ holdings in one place – supplying slick and transparent servicing, simplifying reporting and fee management.

The first iteration in the UK was the fund supermarket, a move by a few fund providers to take control of distribution, soon followed by the ‘wrap platform’ which was aimed at helping advisers challenge the dominance of life companies in investment products. Both models attracted progressive ‘new model’ advisers and started to draw business away from established product providers.

It wasn’t long before established providers followed suit and moved toward this new way of engaging and

serving advisers. As ‘A-Day’ came and went, the Life Companies moved towards a Self-Invested Personal Pension (SIPP) offering and the SIPP providers and wealth managers converged on platforms. Retail Distribution Review (RDR) was the catalyst which led to the explosion of the platform market as a way for advisers to access whole-of-market investment solutions and ease payment of advice fees. This new model had disrupted the market to give advisers nearly everything in one place.

“Ob-La-Di, Ob-La-Da”

The big life companies jumped on the platform bandwagon, often using the same wagon maker, to offer open architecture but with the bonus of positioning their own fund ranges front and centre. Asset managers bought or launched platforms, again with an open architecture shop window, and their own investment solutions sat like the sweets located at the supermarket checkout. Continued growth of Managed Portfolio Services (MPS) as advisers focus on financial planning rather than investment management means the independent platform performs the same function as the provider of old – access to a readymade investment solution in a tax advantageous product with management of fee income, but perhaps with much better reporting.

It might be contentious, but I wonder if the disrupted market has settled down and we aren’t too far from where we started: platforms are now product providers.

When wrap platforms were first imagined in

Australia, they were supposed to become the central repository for a client’s ‘financial life’. The idea was that your banking, insurance, and investments would all be managed on a single “platform” that “wrapped” up your finances. In practice, platforms have become a mechanism for offering savings and investment products to retail clients, but no one has yet successfully used them to build the aggregation functionality which many conceived; for example, links to day-to-day banking and saving products. The retail banks are working towards that point, quite often through various incarnations of FNZ technology, but making everything visible to a customer through their banking app relies on the customer having all products under the one roof. Lloyds Banking Group have bought Embark, but the data proficiency needed to match independently advised clients on the platform with those who have a Lloyds bank account is not only complex but skirts dangerously close to the edge of data protection rules.

Before innovation labs started popping up all over the place the saying was that ‘necessity was the mother of invention’. As we face into a challenging economic cl imate for businesses that (almost to a firm) charge on according to value, the necessity will be to clearly target ways in which operational efficiency can be claimed. New proposition development is costly and as net new business gets harder to come by, I believe firms will be looking at how they can improve service outside of onboarding; doing this well can provide differentiation in the market, give better adviser and customer outcomes, and reduce administrative burdens.

Technology vendors such as Moneyinfo and Moneyhub can bridge this gap, but the process still isn’t simple for consumers or advisers. Digitisation and integration have leapt forward hugely in the last few years, triggered by global disruption, so we will see this accelerate as expectations are set. Initiatives like the Pension Dashboard and Open Finance will provide data standards and make competitors play nicely together and this should allow the level of access that all consumers (advised or otherwise) will need to readily, and digitally, engage with their financial life.

So where will platform market disruption come from next? There’s a debate rumbling around ‘adviser as platform’ which we managed to stoke in our recent whitepaper, but will commoditisation and ‘platform as a service’ finally see retail brands consider investment propositions in the same way they’ve approached insurance and credit? Maybe the consumer will drive the next disruption as they become more technologically enabled? Does the platform proposition win because it has simplicity of access all in one place even if it doesn’t offer everything the customer wants or will that same customer prefer to use multiple product providers if they get the right outcomes, and the right information is available to them?

I may be stretching the analogy with platforms, but the Sgt Pepper album was a defining moment in pop culture, has been hailed as an innovative force for song writing and production, and heralded the album era. While the album isn’t dead – Taylor Swift set a record

for occupying all top 10 slots on the Billboard Hot 100, all of which came from the same album – streaming services have changed the way we consume music by giving consumers access to a wide range of songs, and curated playlists, from multiple artists.

There’s probably a whole other blog about financial services and Taylor Swift deciding to control the quality of her product by taking capability in-house, apart from distribution to consumers where there is reliance on agents like Spotify and Ticket Master. But that’s for another day.

“Gonna try with a little help from my friends”

“I've got a blank space, baby, and I'll write your name”

CHRIS MCCULLAM ALTUS INVESTMENT PLATFORMS DIRECTOR ALTUS.CO.UK

COMMUNICATING ESG INVESTMENTS TO CUSTOMERS

Perhaps no hotter topic surfaced in investment banking in the past 5 years than Environmental, Social and Governance (ESG) investing. There is an overarching need from customers who intend to invest in an environmentally and socially conscious way amplified by regulators pushing to eliminate greenwashing and striving to create frameworks by which the ESG performance of corporations can be objectively and generally assessed and presented to investors. These investors can be fund managers and institutional investors, but equally so non-professional small investors. Thankfully, by 2022 ESG investing became a totally mainstream topic with a vast literature of project experiences. In this article we would like to share some of our most important takeaways from implementation projects of customer-facing mobile platforms with an ESG focus.

EDUCATION

We did comprehensive research on how investors feel about sustainable investments and ESG and 87% of survey respondents said that they would like to know the impact of their investments, but they are not overly familiar with the intricacies of ESG and all the different metrics and scorings. The problem of greenwashing is just as much in the public consciousness as ESG itself, and therefore most would-be investors in ESGcategorised assets would like to understand fully what ESG means, and how their money does good in the world.

While lack of awareness of ESG in general is still somewhat of a barrier to the mainstreaming of the topic, the bigger problem is now the lack of deep understanding of key concepts and practices of sustainability. In order to bridge this gap, financial service providers need to educate their clients about these on every channel they have access to. Both disseminating general educational material on the topic to all customers and bringing it up in personal investment advisory sessions are important, but an educational feature in the client portal with videos, tests and articles can also be a powerful and interactive tool to raise the general knowledge level of clients.

EASE-OF-USE

When discussing client portals and mobile applications, ease-of-use is key in delivering value to customers. Assessing ESG investments is a complex topic with a host of metrics and categories. Clarity is key when presenting this data, so the challenge for financial service providers is to display these comprehensive datasets in a way that is both easy-to-understand and accurate. This means the ESG feature of the client application (the whole application in general) has to be easy and enjoyable to use, and the hierarchy of portfolio-level and instrument-level ESG data has to be assembled into a logical and intuitive system.

ABILITY TO DIG DEEPER

This system has to be formulated in a multilevel logic, whereby first the client is presented with a highly aggregated set of key ESG performance indicators, and they have the opportunity to drill down if more detailed information is required. Different customers have different information needs: some may be completely satisfied with only seeing green lights across the board in terms of the contribution to ESG goals of their portfolio, while others may be curious to see the underlying metrics on an instrument level to really understand the drivers of such performance. The point is that a state-of-the-art system has to cater to both tastes by providing an aggregated view that provides the “big picture” in an intuitive way as well as the option to click through to more detail if needed.

MORE TRANSPARENCY = MORE INVESTMENT

In conclusion, there is a business opportunity in supplying customers with clearly presented information about their current investment portfolio as well as investment opportunities. The term “clearly presented” in this context means different things to different people depending on their ESG-specific base knowledge and preferences to detail regarding the drivers of performance in sustainability. The good news is that the methodologies for scoring assets, mitigating greenwashing from the regulatory standpoint and presenting information to clients have all improved and have continued to improve in giant leaps in recent years resulting in both customers who are more confident that the money they invest actually goes to the right place as well as financial service providers who can find tried-and-tested solutions to their ESG presentation and reporting needs. At the end of the day, this all leads to more investment going to sustainable assets on the long run.

GYÖRGY SOMOGYI, HEAD OF BUSINESS EXCELLENCE COMPETENCE CENTRE DORSUM

OUTCOMES MONITORING IN A CONSUMER DUTY WORLD

The Consumer Duty will be the cornerstone of the future regulatory regime, and is a significant regulatory intervention aimed at raising standards. The proposed new principle – ‘A firm must act to deliver good outcomes for retail customers’ and the associated crosscutting rules represent a clear shift in approach and a significant raising of the bar across the product lifecycle and customer journey.

Where good conduct was once demonstrated primarily through adherence to policies, processes and rules, the Financial Conduct Authority (FCA) is itself focussing more on outcomes and expects firms to do the same. Rules-based compliance, in isolation, has given way to an outcomes-based approach with the FCA expecting firms, and their Boards and senior executives, in particular, to assess, monitor, and be accountable for the outcomes customers receive.

A way for firms to evidence against this requirement is to undertake and embed effective customer-focused outcomes monitoring activity.

WHAT IS OUTCOMES MONITORING?

Apart from ‘outcomes’ being the new buzzword (it is used 152 times in the FCA’s Final Guidance), outcomes monitoring is still quite a nebulous concept. So what is it?

At Square 4, we view Outcomes Monitoring as ensuring that customers receive good outcomes, based on their individual circumstances, at every stage of the customer journey. Typically we find that incorporating a level of direct customer engagement to check and challenge business expectations and affirm that good outcomes are being achieved to be particularly effective.

The articulation of the desired outcomes should be defined by the firm for each component part of the customer journey taking into consideration FCA requirements, the firm’s strategy and business model, its defined standards in relation to customer interactions and customer experience, and its risk appetite. It is useful in the design of the outcomes to consider regulatory expectations regarding the conduct of business and treatment of customers. However, it is imperative that this is more than just a detailed assessment against the FCA rulebook.

Upon reaching a consensus on the outcomes to be delivered, firms should consider the Key Performance Indicators (KPI), Key Risk Indicators (KRI) and respective acceptable tolerances they will use to measure and evidence against the agreed outcomes. Measuring outcomes can take many forms and would include intelligence around; product usage, customer contact effectiveness, file reviews, Market Intelligence (MI) from distributors and third-party suppliers, feedback from analytics on digital journeys, complaints, business persistency rates, vulnerable customer identification and treatment etc. A level of customer engagement is critically important, particularly to test the quality of financial promotions, disclosures, advice journeys and ultimately customer understanding.

In designing the Outcomes Monitoring Framework and execution methodology, we’d encourage firms to think about some of the key drivers behind the Consumer Duty, namely; the irrational nature of consumers, the behavioural biases they display, whether their products are fit for purpose and provide fair value, the level of financial literacy of their target market, known target market risks and vulnerabilities, and the imbalance of knowledge that exists between firms and consumers.

ASSESSMENT THROUGHOUT THE CUSTOMER JOURNEY Know your CVustomer Attitude to risk Capacity for loss Fees and charges

The new Consumer Duty requires firms to put consumers at the heart of their business and focus on delivering good outcomes. To do this effectively, firms need to consistently consider the needs of their customers, and how they behave, at every stage of the product/service lifecycle.

With ongoing monitoring in place, this allows firms to continuously learn from their growing focus and awareness of customer outcomes throughout the journey, which plays to both, firms’ commercial and customer experience agendas as well as the identification, rectification and prevention of any risks of foreseeable consumer harm.

changes to roles profiles and associated training needs for key staff; developing case clinics and quality assurance standards; management information capture and enhanced reporting to key committees and Boards.

With all that in mind, it is clear that developing an effective Outcomes Monitoring Framework requires input and buy-in from stakeholders across the business. Not only to undertake the customer journey mapping and policy and process definition but also with risk, compliance and audit functions to inform their role, scope and frequency of testing through the three lines of defence. While the effort required to develop and implement an effective Outcome Monitoring Framework should not be underestimated, getting it right will play a large role in enabling firms to meet their Consumer Duty obligations.

SIMON GORYL ADVISORY DIRECTOR SQUARE 4

Suitability Appropriateness Advised / non-advised Onboarding

Mid year adjustments Financial difficulty Life events Ongoing service

Redemption Replacement business Transfers PRODUCTS AND SERVICES PRICE AND VALUE CONSUMER UNDERSTANDING CONSUMER SUPPORT Management Information to Senior Management & Boards

It is important firms also implement strong governance processes around monitoring activity to ensure that Board members and executives have; adequate visibility of customer outcomes, can monitor action taken to address issues, and can provide direction back to the business based on trend analysis or concerns. These measures help complete the picture in line with Senior Management Functions (SMF) accountability under the Senior Managers and Certification Regime (SM&CR) and ensure Boards are well placed to approve annual compliance with the Consumer Duty.

COMMON CHALLENGES FACED BY FIRMS

In designing your Outcomes Monitoring Framework, you should consider your current approach to quality assurance, monitoring, metric gathering and Market Intelligence (MI) reporting to ensure leverage of existing processes where possible. That being said, a comprehensive and robust approach to outcomes monitoring could require changes to the definition of good outcomes and the measures for assessment; policy and process definition; sampling volume methodology; developing customer engagement processes; potential

WWW.SQUARE4.COM

ABOUT SQUARE 4

Square 4 was founded with the vision to support people and businesses to grow and thrive.

We combine our industry and consulting expertise with technology and innovation to deliver pragmatic solutions across an evolving spectrum of conduct, financial crime and operational risk.

AFTER THE LATEST CRYPTO WINTER, WEALTH MANAGEMENT FIRMS COULD BRING ABOUT A CRYPTO SPRING

DESPITE THE HEADLINES AROUND THE FTX COLLAPSE, INVESTORS ARE KEEN TO MOVE INTO CRYPTO WITH A TRUSTED PROVIDER

When we started our research into the appetite for crypto investments earlier this year, we couldn’t have predicted that we would publish the research at a time when crypto was receiving such prominent negative coverage. However, our research reflects the market because it shows that many investors are interested in working with an established wealth management firm to start their crypto journey. Digital assets are appealing to investors, but there remains some understandable caution that highlights the role of trusted wealth management firms in delivering crypto services.

INVESTORS WANT TO ENGAGE WITH CRYPTO

We spoke with 267 investors in the UK to learn more about their interest and engagement with crypto and wider investment preferences. Half of those interested in crypto and nearly 60% of current crypto investors would consider investing in crypto with an established bank or wealth management firm. The market segment most likely to use established organisations in the UK is the mass affluent (GBP 100k – 1m). This is a significant opportunity for British financial services because those with the most to invest are also those with the most trust in established organisations to deliver crypto services.

Understandably, volatility came up as a major concern with investors. While the fintech challengers may have been first to the market, established financial organisations can leverage the trust, experience and robustness that investors are looking for. These characteristics will be particularly important when offering support to clients during “crypto winters” and ensuring that both the bank and its customers weather the inevitable fluctuations in the market.

THE INDUSTRY IS PLANNING TO DELIVER CRYPTO SERVICES

We spoke with 50 UK banks and wealth management firms. Just 2% have no interest in implementing crypto. 62% already have a crypto offering and 24% have ongoing initiatives to deliver crypto in the near future. Of the rest, 10% have no active projects but plan to implement crypto in 1-3 years and 2% state that crypto is under consideration. The reasons stated – including customer attraction and retention, and the creation of an additional revenue stream – show that the industry recognises the commercial opportunity and the importance of addressing customer demand.

However, there is a lack of alignment with investors’ goals and motivations. UK organisations selected the age range of 30-40 years old for their target market and over half would target customers in the upper mass market with 10k to 100k in assets. The stated ideal target represents just 4% of the people who would use established banks and wealth management firms for crypto. Current crypto investors have 15-30% of their investments in crypto and those who are High Net Worth Investors (HNWI) should be prime targets for organisations looking for commercial growth.

UNDERSTANDING THE MARKET DEMAND FOR CRYPTO

The good news is that the opportunity of crypto is clearly larger than expected. A true understanding of the market ensures that established financial institutions can align to the market segments where they have existing brand awareness and craft a service provision that matches those needs and their expertise. Our research with current crypto investors shows that they are quite satisfied with the digital investing tools that they use. However, the responses didn’t offer a resounding endorsement and 16% would invest more if they had not have more reliable tools. Crypto may be an opportunity to attract new business from HNWIs not currently served by their existing firm.

EDUCATION, EDUCATION, EDUCATION

70% of our survey respondents – both current and future crypto investors – that are very likely to use traditional providers would expect crypto education and information as part of the service. Established firms can leverage their position of trust and their expertise in investment to help customers looking for more support. The opportunity that crypto presents to reinforce customer loyalty and attract new business is clear and rooted in the need for education and support.

PARTNERSHIP AND POSITIVE UX ARE THE CORNERSTONES OF A SUCCESSFUL CRYPTO STRATEGY

Given the size of the commercial opportunity that crypto investing represents, it’s important that financial institutions act quickly before fintechs are too dominant in the market. This urgency underscores the need for partnerships with organisations that can deliver an expert, high quality crypto service. Firms will need to partner with providers that align with their current regulatory standards, and it is for the crypto industry to level up and meet that demand. The need for education and support also highlights the importance of an easyto-use digital interface that aligns with the brand and supports the need for education and market information.

Our experience with delivering a positive user experience that includes open banking functionality means that CREALOGIX is well-placed to support the crypto ambitions of our clients. A dashboard that provides a consolidated view of all accounts and investments, together with built-in solutions for financial education, will be a powerful tool for attracting both current and future crypto investors. CREALOGIX can also support a hybrid service provision and can therefore connect investors with their adviser via a simple, secure digital interface. This may be particularly important for those new to crypto, but it will also show some value for those current investors looking to invest more in this area – and for all investors during periods of volatility.

EMBRACING THE CRYPTO OPPORTUNITY

Our research shows that firms may be directing their attention too narrowly when it comes to the target market and may not have incorporated the full spectrum of customer needs and expectations into their plans. However, it does also show that crypto has hit the mainstream and most financial institutions are currently delivering or implementing a strategy in this area. A resurgent crypto spring, with established firms at the forefront, may be just around the corner.

JOHN ENNIS MANAGING DIRECTOR, NORTHERN EUROPE, MIDDLE EAST AND APAC CREALOGIX CREALOGIX.COM

HOW CAN FCA-REGULATED FIRMS MASTER OPERATIONAL RESILIENCE IN A VUCA WORLD?

We’ve all learned the hard way – with March 2020 holding particular significance – that disruption comes in many forms. And we can’t always predict what’s around the corner.

Ongoing pandemic implications, market uncertainty, economic volatility, supply chain struggles, talent shortages, cybersecurity and climate risk are all concerning global trends for businesses to watch into 2023 and beyond.

It’s no longer good enough to have a disaster recovery plan, International Organization for Standardization (ISO) accreditation and yearly audits. Today, those checks are the absolute minimum baseline. Compliance standards do not consider the specifics, such as the organisation’s business model, strategy and value proposition. Being merely compliance-driven does not guarantee an increase in resilience, nor does it build governance processes that are fit-for-purpose.

Operational resilience is more than a regulatory requirement; it is an essential long-term strategy for progressing on wider company goals and increasing stakeholder interests such as sustainability.

OPERATIONAL RESILIENCE IS NO LONGER OPTIONAL

Earlier this year, the UK’s Financial Conduct Authority (FCA) set out new regulatory standards for operational resilience, creating a new mandatory framework for banks, building societies and other specific financial institutions. The European Commission is following suit with its Digital Operational Resilience Act (DORA), as is the Australian Prudential Regulation Authority (APRA)

The FCA’s new rules came into effect on 31 March 2022, giving financial services firms just three years to embed appropriate metrics and controls to measure ‘important business services’ and set ‘impact tolerances’. To maintain compliance with the new standards, financial services firms must be able

to evidence they are operating within their impact tolerances no later than 31 March 2025.

Operating within this framework will help FCAregulated firms understand and evidence that - should a critical system fail - they can continue to operate without serious adverse effects on the business and their customers.

STAYING AHEAD OF DISRUPTION AND REGULATORY RISK

The term ‘operational resilience’ has been around for years, but it has steadily been gaining more traction since the first waves of COVID-19 and the resulting risks, which encompassed everything from cyber crime to supply chain shortages.

On the surface, the definition of operational resilience sounds simple: ‘the ability of firms…to prevent, adapt and respond to, recover and learn from operational disruption’. In practice, however, this is incredibly complex. As an organisation, you need to create an operational resilience framework taking a holistic view of your business, operations, finances, governance, regulation and compliance, information security, Environmental, Social and Governance (ESG) impact and more. All core elements of the business need be ‘operationally resilient’ by design as organisations grapple with significant uncertainty and emerging risks.

You’ve got to be certain of the scope and the ways in which the business is looking at its risk and looking after those risks on a daily basis. Risk management is often undertaken by various teams in differing ways. To understand the organisation’s position, you need to be able to view all these risks together as a whole, understanding how they will impact the entire organisation.

USE THE OPPORTUNITY TO GET YOUR FIRM IN ORDER

The good news is that the scope of operational resilience provides a thorough lens across these issues and how organisations can, and will, perform when (not if) a critical event ariseswhether it’s a one-off event like a cyber breach or a sustained impact such as COVID-19.

The lifeblood of your business is in its critical processes – the way day to day operations are set up to run, how information is distributed and secured and, ultimately, how decisions are made. Getting your Governance, Risk and Compliance (GRC) processes right is not only key to your success but is increasingly becoming a ‘ticket to play’ to stay on top of and address the ever-changing risk landscape and arguably, to exercise duty of care and diligence as these risks are now a core governance concern.

Ansarada has over 17 years’ experience in information governance helping people get their businesses in order – from helping to transact over 1 trillion dollars in Merger and Acquisition (M&A) deals and procurement on our platform, to technology enabling board meetings and Governance, Risk and Compliance (GRC) processes to run like clockwork.

MEET FCA REQUIREMENTS WITH THE LEADING OPERATIONAL RESILIENCE SOLUTION

Identify important business services, set impact tolerances, and map all of them in a simplified dashboard view with Ansarada TriLine GRC.

By using TriLine GRC to manage your Operational Resilience, you can ensure that you can easily evidence your important business services and that you are reviewing them on a regular basis. Reporting outputs highlight any services that were deemed to be outside of your firm's impact tolerance and what remedial actions were taken. Scenario testing can be recorded on a regular basis and upon a material change to your firm.

Bringing order and governance into all aspects of how you run your business is the difference between average results and excellent ones, every time. The difference between failure and success, and the backbone of operational resilience.

RACHEL RILEY

CO-FOUNDER AND HEAD OF GRC ANSARADA

NAVIGATING THE COMPLEXITIES OF DATA SOVEREIGNTY IN THE FINANCIAL SERVICES INDUSTRY

Data laws and regulations vary globally, making it challenging for businesses to balance data governance with their strategic objectives. The United Nations Conference on Trade and Development (UNCTAD) reports that over 70% of countries have legislation in place for protecting data and privacy, and the acronyms for these data privacy laws, are becoming more and more recognisable. In most cases, firms also have the responsibility to comply with local data and privacy laws of the jurisdictions where their customers are located, increasing the pressure on these organisations.

In addition to data sovereignty and residency laws, financial services organisations must also comply with other relevant regulations and security standards. These laws reinforce the need for such firms to have robust support in meeting the various governance obligations for data storage, transfer and security, whether it is across multiple data centres, in the cloud or a combination of both.

DATA SOVEREIGNTY CHALLENGES IN BUSINESS COMMUNICATION

As for the cloud, it is the basis for many advances in the financial sector. Cloud-based tools, such as Microsoft 365, help organisations around the world to collaborate and communicate in real time, which facilitates innovation and improves efficiency. However, the increasing use of these services has led to a strong reliance on third-party service providers, which generates additional issues when it comes to data sovereignty laws. Financial institutions do not have direct control over how their data is being handled by these third-party providers and may experience unexpected compliance breaches as a result.

This is perfectly illustrated by of US Federal law that requires businesses to maintain detailed records of their electronic messages, which means having complete visibility and control over these communications. JP Morgan learned a compliance lesson the hard way when it was fined $200m (£164m) by the US Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC) for allowing employees to use unauthorised business communication applications, circumventing Federal record-keeping laws. Similarly, last week Morgan Stanley penalised some of its employees with hefty fines that ranged from a few thousand dollars to more than $1m (£820,000). The cause, according to Financial Times, was the misuse of digital messaging platforms like WhatsApp for sensitive information exchange.

According to the General Data Protection Regulation (GDPR) Fines and Data Breach Survey published in early January by DLA Piper, European data regulators issued a record €2.92bn (£2bn) in fines over the course of the previous year, signaling a striking 168% increase compared with the 2021 figures. This is a dangerous trend that could have a big impact on the financial performance of companies that refrain from taking decisive action. Legislation like the Digital Operational Resilience Act (DORA), adopted by the European Council in November 2022, is aimed at tackling the possible implication of this issue. The Act focuses on strengthening the IT security of financial organisations, such as banks, investment companies and insurance firms, ensuring resilience even in cases of severe operational disruptions caused by cyber attacks. DORA was designed specifically for third parties providing Information Communication Technologies (ICT) and other similar services to entities in the financial sector, to make sure they can effectively respond to and recover from ICT-related risks and disruptions.

WHAT CAN BE DONE TO ADDRESS THESE ISSUES?

Various international data privacy and residency regulations and the differences between them certainly pose serious security and data management difficulties, multiplying the risk of severe penalties and reputational damage. To address the current challenges, the financial services industry must approach data sovereignty policies in a proactive manner. This includes implementing robust security measures to protect against data breaches and carefully addressing the risks associated with cross border data transfer. By using data localisation, or in other words, storing and processing data within the geographic jurisdiction of its origin, organisations can ensure compliance and prevent data access by foreign law enforcement agencies.

A notable example of the latter is the 2013 legal dispute between Microsoft and the US Department of Justice (DoJ). The DoJ requested that Microsoft provide access to emails related to a narcotics case from an account hosted in Ireland. Microsoft refused, arguing that it would violate EU data localisation and protection laws. The initial ruling favoured the US Government, stating that American companies must comply with valid search warrants from US law enforcement agencies. In 2016 Microsoft appealed, and the court ruled in the company’s favor, supporting the idea that US search warrants do not extend to data stored abroad, but are considered valid in cases when it is stored in the US.

Along with data localisation, it is important to ensure continuous improvement and evolution of data governance frameworks. This involves establishing clear internal policies and leveraging encryption, as well as frameworks like zero trust, to protect information from unauthorised access, corruption or theft throughout its entire lifecycle. It also includes regular audits and reviews to ensure that the policies and procedures in place are being enforced efficiently and embraced by all stakeholders.

Data sovereignty is a critical issue not only for policymakers around the world but also for executives and Boards of Directors across various industries and regions. With the increasing globalisation of the financial services industry, information is crossing borders faster than ever before, making it challenging for organisations to ensure compliance and security at all times. Given the risk of reputational and financial damage in the case of non-compliance, companies must take a proactive approach to data sovereignty by adopting data localisation strategies, strengthening data governance and security frameworks, and working collaboratively to address global challenges. After all, it’s much more effective to view compliance and risk management as an incentive for much-needed security improvements, rather than just as an impediment.

MAX BUCHAN CHIEF EXECUTIVE, WORLDR WWW.WORLDR.COM

WHAT DOES THE UK’S DIGITISATION OF SHARE CERTIFICATES MEAN FOR ADVISERS?

Digitisation and the removal of paper processes across the economy is an accelerating trend, driven in part by the UK Government’s ambition to improve efficiency, resilience and sustainability. This shift, as an example, is already apparent in the modernisation of laws regarding international trade, with the Electronic Trade Documents Bill moving to scrap paper bills of lading and other trade documents.

Now, investors and their advisers sit at the heart of another important digitisation mandate – that of digitising shareholdings and eliminating the use of paper share certificates. As details emerge and plans evolve, advisers will need to be aware of the benefits to them and their clients, as well as the potential opportunities for them to participate in, and help shape, the transition.

In July 2022, the UK Government accepted the recommendations of Mark Austin’s UK Secondary Capital Raising Review, which investigated the role of technology to transform how individual shareholders communicate with the companies in which they invest and participate in secondary raises. As key to achieving this, one such recommendation was the digitisation of paper share certificates in a way that allows existing paper shares to be transformed into electronic holdings with the same substantive shareholder rights.

ADVISERS WILL HAVE A KEY ROLE TO PLAY

Digitisation could affect millions of UK investors and their advisers, along with the companies that issue the shares. Although most shares are already in electronic form, UK registrars (who maintain records of certificated shares) believe there are approximately 8.5 million UK shareholdings still held in paper form. This creates several challenges as finding, moving and posting physical paper certificates takes time and risks them going astray. By existing alongside issuance, settlement and communications processes for digitised shares, paper certificates may also pose an administrative burden on advisers, causing unnecessary friction in their engagements with clients.

Having accepted the recommendations of the Austin Review, the Government appointed Sir Douglas Flint, Chairman of asset manager abrdn, to lead a Digitisation

Taskforce. This Taskforce will help drive the initiative forward and one of its key objectives is to work with stakeholders across financial services to build consensus on change. Achieving this and determining the best mechanism is going to require broad industry collaboration, so stakeholders’ input will be vital along the way.

Since this will have a major impact on individual investors, the adviser community will play an important role. As details emerge, advisers will have the opportunity to help shape policy and transition and ensure their clients’ interests and concerns are tabled and addressed.

BUILDING ON EXISTING DIGITISATION EFFORTS

Digitisation promises to deliver significant benefits to investors - including in terms of the costs and management of their shareholdings - but may be new territory to some. However, the modernisation of posttrade echoes other similar digitisation efforts across financial services, such as the move to online banking. This called for a considered and well-crafted roadmap to support customers and deliver improved services and greater efficiency.

For many advisers, digitisation will not be an entirely new trend since the pandemic accelerated efforts in this area, including the move into the digital space by necessity. This became a critical way to engage with investors and offer services and advice during a period of disruption and financial uncertainty.

At Euroclear, we received positive feedback from the intermediary community about how customers primarily accustomed to dealing in paper, adapted to electronic formats during lockdowns. The benefits became clear in practice.

THE ROAD AHEAD

Advisers are now in a position to build on their work to date, but this is going to require a modernised regulatory framework to support their efforts. This is expected to emerge from the Taskforce, along with further clarity on next steps in the coming weeks and months. Interim recommendations are anticipated in the Spring of 2023.

Although the work to transition to the full digitisation of share certificates – which may involve a single digital register - is still very much in progress, it is clear from the outset that collaboration will be the key to success. The Taskforce and other industry participants will soon step forward and engage directly with the wider digitisation community – and it is through these dialogues that the right model will emerge.

Euroclear operates the UK's CREST settlement system, including for digitised shares, so will play a pivotal role in facilitating this change and helping enable a smooth transition.

This digitisation of the UK’s equity markets promises to be transformative. However, it calls for a considered, informed and co-ordinated approach to ensure all parties are given the opportunity to input and have the support they need. By sticking closely to this model of open dialogue and joint working, digitisation will be a win-win for advisers, investors and issuers and help cement the UK’s position as an innovator on the world’s financial stage.

RICHARD FENNER DIRECTOR, GOVERNMENT RELATIONS EUROCLEAR UK & INTERNATIONAL WWW.EUROCLEAR.COM

LIVING WITH THE NEW CONSUMER DUTYAN EMPLOYEE PERSPECTIVE

With the deadline for implementing the new Consumer Duty requirements only a matter of months away and with implementation plans already submitted and signed off by boards, firms’ preparations for CD should be well under way.

Unlike the Senior Managers and Certification Regime (SM&CR), where culture being the catalyst for culture change, arguably only became a central theme in the Financial Conduct Authority’s (FCA) dialogue with the industry after the regulation was live, the FCA has been upfront in talking about Consumer Duty being key to cultural change from the outset. While this has given firms clear sight of the FCA’s expectations, it leaves firms with a real dilemma; that being culture is notoriously difficult to change. This is because, ultimately, culture is the sum of the behaviours of every employee. And, of course, underpinning behaviours are the values and beliefs of every individual across the firm. Hence notoriously hard to change!

Opinions on how best to change cultural have, and continue, to vary but the FCA provided a template for ‘top down’ change by laying out the three cross-cutting rules and four consumer outcomes they expect firms to adhere to. These will create new policies, practices and processes in firms and, so the protagonists of ‘top down’ change would argue, these changes will engender behaviour change and so cultural change. However, this ‘top down’ approach to change skirts over the fundamentals that drive behaviour, i.e. values and beliefs, and while their working practices may have changed, will this create the mindset change in employees that will deliver deep-seated and lasting change expected by the FCA? This creates a potential conflict for employees in that they may believe one thing but be asked by their new working practices to do another.

This leaves me wondering how many project leads and sponsors got to this level of thinking in the plans they presented to their firm’s Board for sign off at the end of October?

1. CONDUCT RULES:

All employees are subject to the Conduct Rules governing the baseline level of conduct and good behaviour expected of everyone working in financial services. Indeed, as part of SM&CR, all employees should have received training in what the Conduct Rules mean for them in their role. In my experience, in the rush to get SM&CR ‘over the line’, despite guidance from the regulator that Conduct Rules training should be role based, many firms contented themselves with taking a broader brush approach. The Consumer Duty provides the perfect opportunity for firms to revisit their annual Conduct Rules training. Of course, this will take senior management focus and resource to achieve. However, if these updated sessions are based on peoples’ roles, particularly if the training uses real world role-based scenarios, they will better make the connection between their current behaviour and that expected by the higher standards being set within the Consumer Duty. And in doing so, this will make individuals consider their underlying values and beliefs.

2. CUSTOMER FEEDBACK:

A key principle within the Consumer Duty is that firms gather information from consumers on their interactions with firms. Some of this data gathering will already be in place, but suspect a lot more will be needed before organisations can truly be comfortable they have sufficient data to validate that they are behaving in a ‘consumer centric’ way. If so, firms should think hard about taking these opportunities to gather not only macro data, e.g. what were the age ranges of customers purchasing this product and how does this correlate with firms’ intentions when designing the product)? But also ‘micro’ data, e.g. gathering immediate feedback from customers after they have interacted with a member of staff and/or been exposed to supporting processes. Although rating requests are becoming more common post any type of consumer/firm interaction, e.g. texts asking ‘how did I do?’, at the risk of saturation, much more data could be gathered to help organisations gain feedback about how individual interactions were perceived by the consumer. In my view, this is potential gold dust for firms to challenge themselves and potentially change behaviours where opportunities exist and are highlighted through feedback.

3. EXISTING EMPLOYEE PROCESSES:

Depending on their business model, firms will also have access to other sources of data that, if looked at with fresh eyes, can be a valuable source of information about consumer behaviour. For example, to what extent is Persistency data, such as customer retention, attributable to employee behaviour? And if there is a hint that ‘drop off’ rates are higher in one area of the business than the norm, then surely this is the perfect opportunity to follow up with the customer and delve into why they cancelled their product and/or service.

Another example is Training & Competence (T&C). Most T&C processes were designed over a decade ago and I doubt many have been given a fundamental rethink since. For example, in the context of the higher standards demanded by the Consumer Duty and behavioural economics, to what extent are questions being considered for inclusion in adviser assessments around the achievement of good consumer outcomes? What overlay is being considered around behavioural economics and consumer bias? I suspect none! However, shouldn’t this be a key source of potentially excellent data about employees and therefore surely it would be crazy if firms aren’t even considering potential changes here? I may be being a little harsh here, but hopefully you get my point. The same could well be argued about file reviews and even upheld complaints. Finally, to what extent are firms using the Consumer Duty to revisit and challenge both the data fed into performance appraisals and even the nature of the appraisal process itself?

I am picking these examples to illustrate that firms already have multiple processes in place and, for me, the Consumer Duty provides the perfect opportunity to revisit and reinvigorate these processes; bringing them up to date and so in line with the regulator’s expectations about how they might support the delivery of good consumer outcomes.

While I suspect the priority for most firms will be rethinking and re-engineering their processes to ensure they are both more consumer centric, and that they are set to gather relevant data to ensure post engagement assessments of suitability, I am concerned that a focus on employees, their competence and performance (which will be a massive factor in a firm’s success around the Consumer Duty) is taking a backseat. Helping employees both understand the higher standards required of them and making the transition to this higher standard is a key pillar to the ‘bottom up’ change that will complement the ‘top down’ process change. Only by focusing on both will firms deliver the customer centric cultural and, ultimately, the culture change expected by the regulator.

I hope I’m wrong, but I wonder how many firms are really looking at their people processes, like the ones I have outlined, as a key pillar of their preparations? If relegated to a secondary activity, firms are leaving themselves open to ‘failure’ because no matter how much ‘top down’ change is enacted, without employees’ ‘hearts and minds’ the cultural change expected from implementing Consumer Duty simply won’t embed.

JULIE PARDY DIRECTOR OF REGULATION WORKSMART LTD

A BATTLE PLAN TO WIN ON CUSTOMER EXPERIENCE

The importance of customer experience has grown dramatically over the past five years, with a shift in a quest to retain existing clients and attract new ones. On one side, it is much in demand by clients expecting to have their services and products easily accessible and to receive personalised and tailored advice from their wealth manager; on the other, wealth managers themselves want to differentiate from competition to capture a greater share of wallet and benefit from referrals.

Although wealth management has always relied heavily on being a bespoke service mainly delivered in person, things have changed. The expectation is that financial advice will be delivered not just via the relationship with the wealth manager, but also through the quality and the content of digital interactions

Let’s think about the investor portal. Suppose a client has mentioned to the wealth manager that they have a particular interest in, say, carbon-neutral investments. In that case, they now expect to see interesting content within the client portal. They might also want to see a list of coherent investment strategies and vehicles together with some performance data. To enhance the overall experience, a dynamic portal should enable effective advice to make recommendations based on the client’s preferences and constraints, using augmented intelligence and algorithms to design an optimised investment proposal.

The nature of the actual communication with the adviser is also critical to the customer experience. A personalised portal can create a ‘wow’ moment with the customer. If they can then act quickly by having access to the adviser over the channel of their choice and at their preferred time, then that consolidates the wow factor. It is also important to remember that an omni-opti-channel does not mean factoring out faceto-face contact. Having the choice over how and when to contact the adviser just deepens the relationship and makes it more likely that the number of touchpoints will go up, thus making the face-to-face more beneficial and informed when it does happen.

That’s why most wealth managers are aiming to improve their hybrid operating model. Face-to-face and remote are not mutually exclusive. Obviously, for some things, a client just wants to log on and check something out; for others, they need a face-to-face in-depth meeting.

CUSTOMER EXPERIENCE AND THE ABILITY TO SCALE

This all contributes to the excellence of customer experience, but it also drives efficiency and scale. If the wealth managers have a dynamic system to strengthen client relationship through integrated digital capabilities, they are able to deal with a greater number of clients and thus concentrate on their core business doing more in less time, adding scale through efficiency.

Indeed, scale is the second part of the equation – it is no use being able to attract and retain clients if the cost to serve remains sky-high. So too, does the ability to procure and treat data at the back end so that it is fit for purpose at the front, delivering customer experience and the ability to scale. Firms need to be sure that they have true front-to-back integration to win the battle for customer experience and scalability.

Objectway’s research with financial firms’ senior executives identifies that wealth managers know all of this, as improving the customer experience is at the very top of their agenda. So, it is no surprise that seven out of 10 firms are looking to invest in their digital estate.

Digital change is massively driven by customer experience, digitisation not only enhances it, but also makes for operation automation and efficiency too. This makes for better business as having a good customer experience makes for retention, greater share of wallet, and referrals.

To give some examples, specifically to what extent technological change is having an impact on customer experience and what can be achieved via a customer centric approach, one of our wealth manager clients upped their digital engagement (as measured by how often the client logged in) from 25% to 60% within 12 months of investing in joined-up and digital technology.

IMPACT OF TECHNOLOGY ON CUSTOMER EXPEREINCE

For another client, investing in technology to enhance the customer experience meant increasing its Assets Under Management (AUM) by 25% due to new client growth, along with share of wallet and referrals. Front office productivity also boomed, with advisers managing some 20% more clients than previously due to efficiency gains.

For wealth managers, the next few years need to be about the evolution to a client-led enterprise. Firms must overcome cultural and adviser inertia to prepare for a new generation of clients while not abandoning their core constituency. According to several market studies, in fact, digital-first applies to all segments of clients. Regardless of AUM, they will ask to pick and choose different modules of advice, products, and services to create their own personalised experience.

So, the client-led enterprise has to be enabled by technology. Digital solutions will form the base layer to cater to more traditional, higher wealth clients, who increasingly expect enhanced digital experiences along with traditional human-led bespoke service offerings, along with a digital-native younger generation of clients inheriting wealth.

HASSAN SUFFYAN MANAGING DIRECTOR UK & IRELAND OBJECTWAY WWW.OBJECTWAY.COM

SHARPFIN TREND REPORT 2023

Welcome to the first annual Sharpfin report about trends in Wealth Management! We have gathered ten trends that influence the day-to-day business of wealth managers globally. To be relevant for the years to come, wealth managers must relate to these trends and make sure they have vendors and providers who understand them and work with them.

TREND 1: ESG INVESTING

Although Environmental, Social and Governance (ESG) investing isn’t really a trend anymore, there are always trends within ESG coming and going. Green investing, Socially Responsible Investing (SRI), and now green hydrogen are some of the pillars, and without a focus and commitment to ESG investing, wealth managers face losing clients:

Research from behavioural finance experts Oxford Risk shows that 63% of the questioned retail investors had already moved, or would consider moving, their investments to new advisers if they were not happy about the ESG focus their current wealth managers showed.

TREND 2: AUTOMATION

Companies will be making many choices about automation in the next few years - choices that will influence how employees, customers, and other stakeholders perceive the company. Remember that using smart tech solutions requires leaders to learn more about automation and how to use tech in a way that makes work better, healthier, and happier for everyone.

TREND 3: INSTANT PAYMENT SOLUTIONS

In an on-demand, open banking world, instant payments are needed. Consumers are increasingly turning to new forms of payment, embracing contactless and mobile solutions due to the convenience these m ethods bring. In a recent survey conducted by Mastercard, 93% of consumers said they were willing to try new emerging payment methods, offering more security while keeping the convenience of instant payments, a trend that’s becoming increasingly standardised by the day. Open banking and instant payments are currently being embraced by the entire financial sector, and are starting to find their way to all sizes of players in the field.

TREND 4: MICROSERVICES

With microservices, intricate systems are broken into smaller pieces separate from the main framework. This enables developers to build innovative cloud-native applications that enhance business value quickly, without the need to change the whole infrastructure, pushing innovation at a quicker pace.

TREND 5: CYBERSECURITY

As technology advances, so cybersecurity needs to. Businesses are already taking online security issues more seriously today than before, and that interest is expected to grow. From 2022 to 2030, the global cybersecurity market is expected to expand at a compound annual growth rate (CAGR) of 12% – something to keep in mind during the coming years.

TREND 6: ALTERNATIVE DIGITAL INVESTMENTS

The industry of alternative investments is ever evolving and, as we all know, the pandemic has increased the pressure to digitise. Data and technology are at the centre of many industries, not least investments, changing the current and future priorities of asset managers. Whether it’s cryptocurrency, Non-Fungible Tokens (NFT), or Decentralised Finance (Defi), you can expect to see more of it in the coming years.

Keep in mind: Just as the future is as risky as it is exciting, so too can alternative investments be.

TREND 7: THE CLOUD

With a continuous influx of data, there’s no question whether the cloud’s boom will increase or not. The question is rather how organisations will adapt to cloud management software, and how cloud investing will advance.

Keep in mind: Despite the clear increase in cloud solutions across the business landscape, many are not fully aware of how it will alter the way businesses operate today.

TREND 8: DIGITAL CUSTOMER-CENTRICITY

Human-centred design looks to be business critical for wealth managers in the future.

The wealth management industry has always been known for its reliance on interpersonal relationships. Therefore, as firms gear up their digital acceleration, they must do this with a mix of tech-driven efficiency together with a human touch.

A study by Temenos found that an emotional connection to a firm or service can increase customer lifetime value by 800%. As part of their digital transformation, financial advisers are embedding customer-centricity into their product and interface designs to ensure a superior customer experience.

TREND 9: INTERNET OF THINGS

With Wi-fi 6, 5G and many other new technological features coming, the growth potential of the Internet of Things (IoT) industry is vast. Regardless of industry or field, IoT will be one of the most influential digital transformation trends during the coming years – with investments in related companies increasing as well.

Keep in mind: The technology is moving faster than the regulatory environment, so make sure you’re aware of potential risks.

TREND 10: INFLATION

Although it was initially held to be a short-term trend, it’s clear now that inflation isn’t going away anytime soon. Instead, it’s time to start rethinking how the digital landscape will alter the current economic climate; how businesses can use IoT, data, the metaverse, and more, to drive industries forward, navigate the future trends, and face the future economy.

ABOUT SHARPFIN:

Sharpfin is the ambitious challenger providing a cloud based, powerful front office solution built on better technology for the financial community in the areas of wealth management. Sharpfin’s competitive edge also lies in the depth of knowledge of wealth management and how to delight the end customer with the help of better technology.

Sharpfins customers include successful niche banks, wealth management firms and family offices across the European region. Sharpfin provides sales and quality support services from its headquarters located in Stockholm.

You can learn more about Sharpfin and the digital currents in Wealth management here: https://www.sharpfin.com/whitepaper

FINANCIAL CRIME CONFERENCE 2023

PIMFA TRAINING: MEETING YOUR CLIENTS ESG NEEDS UNDER CONSUMER DUTY

PRINCIPLES AND PRACTICES YOUR ADVISER POPULATION NEED TO KNOW AND ADOPT

18

MAY |

10-6PM LONDON AND STREAMED ONLINE

The PIMFA Financial Crime 2023 gives attendees access to industry leading debates from professionals across the regulatory, law enforcement, innovators and providers in the Financial Crime space. FIND

27 APRIL | 09:30 – 12:30

LIVE ONLINE LEARNING

In less than seven months, the FCA requires you to be able to evidence that your firm is putting themselves ‘in the shoes of your customers’, acting in good faith, avoiding causing foreseeable harm and enabling customers to achieve their financial objectives.

This CPD Accredited and CISI Endorsed course takes you step by step through a framework your firm can adopt to improve your approach to client suitability, the critical component in your firm’s ability to meet the Duty’s two outcomes on customer support and consumer understanding.

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WOULD YOU LIKE TO CONTRIBUTE AN ARTICLE?

Alongside updates from PIMFA, the Journal includes several useful inputs from our associate member firms. These articles are an excellent opportunity to gain interesting insights into the wider industry and to learn more about PIMFA associate members. If you are an associate member and you are interested in contributing to future editions of the Journal then please contact:

Richard Adler, Director of Strategic Partnerships (richarda@pimfa.co.uk) or

Sheena Gillett, PR & Communications Director (sheenag@pimfa.co.uk)

@PIMFA_UK www.pimfa.co.uk

BUILDING PERSONAL FINANCIAL FUTURES