BDO: What twin peaks means for fund managers

Michelle Carroll 160 byline

We recently conducted a large piece of research with DLA Piper, the international law firm, to look at the extent to which the financial services industry as a whole is prepared for the new twin peaks regulatory regime.

Clearly the fund management community will be directly affected by the incoming regulation – compounded by legislation being driven out of Brussels – and our research demonstrates that the financial services industry is bracing itself for an increase in regulatory cost over the next two years. It also highlighted that firms are not adequately considering the anticipated increase in personnel costs the increased regulatory burden will require.

‘The new twin peaks model: A report on the financial services industry’s views on upcoming regulatory issues’ shows a relatively positive picture with regards to the industry’s view of the new twin peaks regime and suggests a collegiate approach with the FCA is the preferred approach to tackling the barrage of new and existing regulations. The majority of respondents (79 per cent) think the twin peaks regulatory system will result in improved efficiencies and ultimately directly benefit clients (58 per cent). But the report finds that the financial services industry is underestimating the costs associated with increased headcount.

Our findings show 63 per cent of those polled expect a significant increase in financial cost from the regulatory change and 68 per cent expect a significant increase in time spent communicating the benefits and changes to clients but evidence suggests that financial services companies underestimate the headcount ramifications of the new regulatory regime. Whilst respondents acknowledge that the cost burden of regulation will increase, these costs do not appear to take into account changes to headcount; 59 per cent say there will be no change to headcount in the next 12 months and 20 per cent say no change in headcount in the next two years, with 53 per cent saying a 1-10 per cent increase in the headcount of the compliance/risk function at most over the next two years. However, if compliance functions have their hands full with the current catalogue of regulatory developments, then an acknowledgement of the effort that will be required to embed new regulations should follow, in the form of increases in compliance team headcounts of 40-50 per cent, rather than 10 per cent.

There needs to be a reconsideration of the impact the new approach by the FCA will have on headcount in the areas of compliance, risk, finance and legal. The introduction of thematic reviews as the key touch points between the majority of asset managers and the FCA needs to be reflected in the firm’s approach to regulation. Chief executives will be under more pressure to be accountable yet still with a finite amount of time to dedicate to their roles. This means the need for more intelligent regulatory analysis and reporting. If all firms are going through this change simultaneously, not only does it logically mean that more resources will be required to implement these changes but the increase in demand will lead to an increase in the market value, so less bang for the same buck.

It is clear that fund management industry should consider adequately resourcing risk and compliance functions ahead of a potential market squeeze.


Michelle Carroll is a partner at BDO Investment Management