The changing face of regulation around the world | RL360

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How regulation has shaped – and will continue to shape – the international wealth advice market

In late March 2012, few of the 300-something people who turned up to celebrate the 50th anniversary of the Life Insurance Association of Singapore, at a Singapore hotel ballroom, expected what they soon got: a lengthy speech by the head of the Monetary Authority of Singapore (MAS), explaining that the city-state’s financial services industry was about to change beyond recognition.

Singapore – MAS managing director Ravi Menon explained – was about to undergo what he referred to as a “Financial Advisory Industry Review”, or FAIR, that would seek to “enhance the professional standing and competence of financial advisers” doing business there.


Singapore’s financial advisers would be expected to know more about the products they sold, Menon said, and for this reason would be required to pass new exams aimed at raising their knowledge and skill levels.


Menon’s speech left “some of the most senior insurance agents [in the audience that night]…reeling”, the Straits Times reported the next day.


Many observers of the international financial advisory scene, however, felt the biggest surprise is that anyone in the industry could have been genuinely shocked to learn of the MAS plans.


Because across the globe – in a wave of regulatory expansion that has yet to slow, let alone stop – country after country has unveiled similar reviews of advisory industry practices.


Typically these reviews have been followed by what are now fairly predictable changes to the regulations governing the way advisers in these jurisdictions are allowed to sell investment products, as well as in the way such products are constructed. And by fresh reviews, which in turn result in more regulations.


Experts say the move towards increased regulation of the financial sector has been driven by a combination of globalisation, which resulted in an explosion in the international financial services industry since the end of the last century, and the 2008 global financial crisis. The “GFC”, as some were soon calling it, saw many investors caught out when their investments – and in some cases, even, their banks and other institutions – turned out to be unable to withstand an admittedly serious market downturn.




British financial advisers were among the first to see changes introduced to their business model, with the Retail Distribution Review. RDR was a game-changing package of regulations which was first unveiled by the UK’s Financial Services Authority, as it was then known, in 2006 – ahead of the financial crisis, but when some problems were already beginning to emerge – and which ultimately took effect on 1 Jan 2013.


Among the changes UK advisers had to adapt to was a shift to a different, more spread-out way of charging for their services, rather than having them come all upfront when investment products were sold.


As a result of RDR, many firms quickly moved to a “facilitated adviser charging system”, whereby they agreed with the customer that a portion of the initial premium they were paying to their product provider would go to the financial adviser who had been helping them.


Another structure that became popular was the “3 + 1” charging model, consisting of a 3% initial commission – either as a fee or facilitated adviser charge – and then an on-going 1% annual management charge.




On the other side of the planet, a few days before Menon’s speech that March 2012 evening in Singapore, legislators in Australia approved their own package of reforms known as the Future of Financial Advice (FoFA), which finally became mandatory in July, 2013. Again, the new regulations were seen as necessary to address a raft of issues that were affecting growing numbers of Australian investors.


Most recently, Australia’s financial services industry has been rocked by a Royal Commission that has been looking into “misconduct” in the country’s banking, pensions and financial services industry for much of 2018.




Other recent examples of the global move towards more legislation of the financial services sector include the Isle of Man’s Conduct of Business Code, due to begin coming into force on 1 Jan 2019.




A package of proposed regulations in the United Arab Emirates has been mooted by the Insurance Authority, aimed at the country’s life insurance sector – the final details of which, and compliance deadline, have yet to be published.




Hong Kong has also made major changes to its regulations, with the result that many advisory firms there have been forced to change their business models.




Malta is meanwhile making amendments to its existing pensions regulatory regime with a set of new regulations, while the Gibraltar government and the UK’s Treasury announced in June plans to undertake a “diagnostic review” of that territory’s insurance regulatory regime, in order to ensure that its regulatory and supervisory standards are on a par with those of Britain.




In the United States, the battle has taken the form of efforts to introduce what is referred to as a “fiduciary rule”, which would oblige advisers to put the interests of their clients ahead of their own – for example, ahead of their potential ability to benefit from the sale of an investment or retirement product as a result of a sales commission.




Then there’s a raft of pan-European measures you will no doubt already be well familiar with, such as the Insurance Distribution Directive (IDD); the Packaged Retail and Insurance-based Investment Products (PRIPPs) directive; and a revised Markets in Financial Instruments directive (MiFID), all of which have been brought in over the past 12 months.




A global move to introduce the automatic exchange of bank account information is also well under way – as you’ve probably also already heard – as a result of the so-called “Common Reporting Standard” being promoted by the Paris-based Organisation for Co-operation and Development.


Under the CRS, around 100 countries, including the UK, UAE and the Isle of Man – and even Russia and China, but not, as of yet, the United States – have agreed to begin automatically exchanging bank account information by the end of this year.




The advisory industry reaction to new regulation is often initially cautious, since it almost always involves increased costs, added red tape, greater risk of legal problems and, almost always, a need for industry participants to boost their skill levels.


They argue that new regulations tend to drive smaller firms out of business, while also resulting in less-affluent clients being shut out of the advice sector altogether, as they are reluctant to pay what they tend to see as high fees for services they previously understood to be free.


Certainly this has been the case in some jurisdictions, such as Hong Kong.


It’s worth noting here, though, that in the UK, at least, statistics published earlier this year appears to show that far from causing British advisory businesses to shrink, become less profitable and/or decline in number, the introduction in 2013 of RDR has done the opposite.


The numbers, contained in a “Data Bulletin” released in June by the UK’s Financial Conduct Authority, showed that the number of intermediary firms that said that they earned revenue from retail investment businesses actually grew by 10% between 2013 and 2017, even as the revenues earned by these companies also grew, by 52%.




Two other trends have also emerged as a result of RDR, and the global move towards more regulation. One has been the rapid growth of advisory “networks”, whereby independent advisory firms establish commercial links with similar businesses across the country and even around the world, which give them access to a wealth of information, data, training programmes and marketing services at a fraction of the cost they would have to pay to provide these things for their management and employees themselves.


Examples of such networks in the UK include Openwork, Nutmeg and Intrinsic, while offshore networks include Blacktower’s Nexus Global and Globalnet.


Another strong positive that RDR has delivered to the UK advisory sector has been the fact that by moving towards more ongoing-charging models, small IFA businesses have become far more “saleable” than they were in the past, as they now come with a book of business complete with an attractive and valuable ongoing revenue stream.




“In my opinion, RDR has been massively, massively positive for almost all of the stakeholders in the financial planning equation – from the business owners to the IFAs to, and most importantly, the clients,” says Tom Evans, private client director for W1 Investment Group, an advisory business based in Qatar.


“The reputation of financial advice in general in the UK has gone from being relatively murky to being, while perhaps not yet quite on a par with accountants and solicitors, not a huge way off, and it will probably get there over the next five to 10 years.”


Paul Stanfield, chief executive of the Federation of European Independent Financial Advisers, a trade association representing English-speaking financial advisers operating throughout mainland Europe, argues that the new regulatory environment actually offers an opportunity for on-the-ball firms to get a first-mover advantage over their reluctant-to-change rivals.


“I see [the myriad changes taking place in the cross-border insurance industry] as representing a fantastic opportunity for progressive IFA companies that are willing to plan ahead and embrace the new environment,” he says.


"While this may sound trite, we are already seeing some evidence of this in markets that have recently introduced major regulatory changes.


"In such markets, it is clear – and not really very surprising – that the businesses that embrace change, and start planning sooner, are the ones that are finding the new world far more amenable."

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