Rising regulation means increasing the amount private
banks have to spend on upgrading their IT infrastructure. Alison
Ebbage finds that IT systems for wealth managers are underinvested,
meaning costly times ahead, but suggests several ways to tackling
this mounting overhead.
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A veritable tidal wave of information and new legislation aimed
at ending tax evasion could overwhelm private banks. The US HIRE
Act, an upcoming review of the EU Savings Directive and increasing
demand for tax information exchange agreements (TIEAs) are the
obvious ones.
Markets in Financial Instruments Directive (MiFID), Deposit
Guarantee Schemes and BASEL III are already being dealt with.
The cost to wealth managers of this
compliance is huge. Systems, on the whole, are underinvested and
lacking flexibility, adaptability and can struggle to interact.
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By GlobalDataBalancing compliance and
operational efficiency
Steve Dyson, managing director at
consultancy Dyson Associates, says private banks face the challenge
of maintaining compliance and operational efficiency.
“The cost to income ratio is 70% in
some cases and so the investment needed just to keep up can be
crippling,” he says.
For an industry built around
confidentiality, robust systems to safeguard personal data are a
key part of the client offering. In this sense then, could offering
operational excellence be a key selling point?
George Hudson, head of policy at
STEP, says the review of the Savings Directive and the US Foreign
Account Tax Compliance Act (FATCA) will both require banks to
collect information about clients that they do not currently
hold.
“That will take up resources in
terms of reassuring clients about where the data will end up and
also in IT spend to ensure systems are robust and confidentiality
is guaranteed,” says Hudson.
I
Blanket approach to
regulation
ndeed, every time a new law comes
into place, wealth mangers need their compliance, operations and IT
teams in place. When there is more than one thing happening then
the workload increases accordingly. To complicate matters, recent
regulations have taken a blanket approach to ‘the industry’ as a
whole as well as requiring speedy implementation.
“It’s true that there’s been a
general lack of appropriate consultation – due to the tight
deadlines imposed by politicians. Regulators have adopted a blanket
approach,” says Gavin Quinn, associate director at JWG (Joint
Working Group).
“For example, there’s MIFID,
Deposit Guarantee Schemes, BASEL III and other rule changes which
are all designed to improve the level of customer knowledge that
have different viewpoints and agendas. Little thought has been
given to how firms in different sectors and with different
structures are going to be able to adopt all of it and then
maintain compliant infrastructures.”
On a basic level, if a firm
is not compliant it cannot transact and faces huge reputational
risk and fines that could mount. On the other hand, in the face of
time limitations and huge operational cost, is there a strategic
decision to be made about the extent of that reputational risk,
whether the fine is likely to be overwhelming and whether a waiver
can be obtained?
Patched legacy systems ‘big
part’ of inefficiency
Hudson, for one, thinks there will
be few get-out clauses: “The HIRE act, for example, is very hawkish
if you look at the first lot of guidance from the US Internal
Revenue Service. I doubt they will be giving out very many
exemptions.”
What then are the options for
wealth managers? Many wealth managers are part of larger
institutions that will have their compliance issues mopped up by a
dedicated department – they have the scale and the capability.
The mid-tier firms are likely to
struggle as some may still be using excel spreadsheets and most
have patched legacy systems that would simply be unable to take the
70-odd system changes that Dyson estimates will require.
PricewaterhouseCoopers partner
Jeremy Jensen says that patched legacy systems are actually a big
part of operational inefficiency at such firms.
“Too much time and money is spent
dealing with system-generated errors and problems,” he says.
Buying in vendor
software?
Quinn says that patching and buying
in vendor software can be a good solution in lean times.
“Many software houses offer a good
answer as long as the software can be adopted to that firm’s model.
A ‘one size fits all’ vendor solution can create problems though as
it is not going to be very referenceable and also the firms that
are using it are not all going to be starting from the same
position,” he warns.
Another option is self-build.
Attractive, perhaps, for brave heads of IT with an in-depth
knowledge of their own company’s requirement and nuances, but
surely not for chief operating officers at this time.
Outsourcing
conundrum
That then, leaves a third option;
outsourcing of the middle office. Widely adopted in the broader
fund management marketplace, wealth managers have always shied away
from outsourcing anything dealing with confidential client
data.
But now that the cost of compliance
looks overwhelming, a third-party administrator with an economy of
scale, the resources to keep systems up-to-date and some cost
saving to go with that may provide wealth managers and clients
alike with a sense of relief.
“Although outsourcing might be
culturally difficult and go against the grain of client
confidentiality, it may also be the most sensible long-term
decision,” says Dyson. “Effectively you are buying in expertise and
the confidence that systems will always offer excellence. It can
also be made to look like a proprietary system to appear seamless
from the client perspective,” he says.
Quinn disagrees: “Clients pay the
private banks to provide a service, not to outsource it elsewhere,
especially at a time when there are data security issues. The
economy of scale is the only real attraction, since in effect the
private banks would only relinquish the functionality – if anything
were to go wrong the private bank is still responsible in the eyes
of the regulator.”
Tricky choices now lie ahead for private banks. They must either
reduce costs by outsourcing and deal with the potential fallout if
something goes wrong, or keep it in-house and pay large sums to be
compliant.
