Regulation: Preventing innovation in wealth firms


The need and value for effective regulation is obviously of paramount importance in the financial services industry and indeed the onslaught of regulations and directives that came following the financial crisis has highlighted this even more. 

However, as time has progressed and the economy has moved toward recovery, the burden of excessive regulation has reared its head. Are we at the stage of too much regulation? Do we need to slow down and allow the new rules created to ‘bed down’ in our industry?

Not only is the weight of regulation a topic for consideration, but also its unintended consequences. In a recent consultation by FCA a discussion has begun about regulation actually forming barriers to progress via innovation in digital and mobile solutions.

This consultation asked for industry participants to consider this challenge and even provide examples of if and when these rules or policies may have stifled development, detailing the impact of delays or complete abandonment of projects.

This is an interesting area and one that is obviously going to be near the heart of many wealth management firms. Taking into account the now pivotal role played by the European Authorities – it can be estimated that 80 per cent of rules are coming from the EU – it is certainly important to note that there has been instances where EU authorities have imposed rules on member states without first consulting stakeholders, undertaken an economic impact or deliberated the additional consequences of implementation on the firm’s business models.

These rules have a substantial economic impact on regulated firms and can cause barriers to innovation as they will need to allocate most, if not all, of their IT budget to develop systems that are compliant to the new rules, rather than investing in innovation.

Current examples

Recently we have seen this in the various Market in Financial Instruments Directive articles. The articles on cost disclosure (24(4), (5) and (9) for those particularly involved in the nitty gritty of breaking down this huge piece of work) were introduced at the publication of the directive with no effective engagement with any stakeholders during the drafting stage.

The Regulatory Technical Standards published by the European Securities and Markets Authority, a document containing technical specifications that do not involve policy choices, introduce a new requirement to publish information relating to all execution venues. All former drafts only referred to the publishing of information on the top five execution venues. This requirement was also introduced without any input from stakeholders.

The rules detailed in ESMA’s technical advice, which contains guidance and recommendations on the application of MifiD II/Mifir rules, concerning portfolio manager reporting obligations require firms to submit quarterly valuation reports to clients. If a firm provides online access to up-to-date valuations, there is no need for the firm to provide quarterly valuation statements. However, the information must be easily accessible and that the firm has to have evidence that the client has not just logged on to the firm’s website but accessed a valuation of their portfolio at least once during the quarter. 

The above rule, rather than promoting innovation, has the unwanted consequence of bringing some firms to abandon online valuation development projects altogether in favour of quarterly paper statements.  Indeed, it is less expensive for a firm to generate paper statements for all clients than to put in place a system that detects whether a client has accessed an online valuation or not, alerting the firm to generate a paper statement if necessary.

What could be done to help?

WMA believes wealth management firms, and the wider financial services industry, would greatly benefit from both the FCA and the Government keeping a close eye on European lawmakers and their activities in order to make sure that stakeholders’ interests are taken into account during the drafting stage of regulations to avoid having to implement policies that hinder technological progress and carry excessive costs.

ESMA stakeholder representatives from industry not only have to give their time but also pay their travel and accommodation. Unsurprisingly there are no industry stakeholder representatives from small and medium firms.

Nobody can be sure of what the future of the wealth management industry will hold but this area is sure to be of significant importance to firms who are seeking to ensure that the evolution and growth of the industry continues through essential means such as digital innovation, an evolution that is helped and not hindered by regulation.

 Giulia Lupato is a policy adviser at the Wealth Management Association.