Regulation is frequently seen
as a brake on business activity, but several participants suggest
that emphasising London’s sophistication and strong regulation
could help differentiate it from its emerging market competitors.
Can FATCA, Basel III and sales suitability help the bottom
line?
Go deeper with GlobalData
Nicholas Moody (NM): Some
suggest this new era of cross-border transparency in Europe is
driving clients away because of concerns about tax information
exchange and banking secrecy. What are the requirements which will
enable the jurisdictions to prosper in this new tax-transparent
age?
Richard Cassell, Partner and
Joint Wealth Planning Practice Group Leader, Withers
Worldwide: The key thing for our jurisdictions is not the
regulations. A stable environment is the most important issue.
People complain in the UK about the gas bill effect, but on the
whole people know what it’s about.
The big change we have from the US
are the Foreign Account Tax Compliance Act [FATCA] rules.
[Editor’s note: since the round table was held, US authorities
have delayed FATCA’s implementation until the beginning of
2014]
We are in an environment where
there is going to be disclosure of tax information, and there is
nothing you can do about that. I still hear banking clients say:
‘Our response to FATCA is we’re going to kick all the American
clients out.’ That’s a complete misunderstanding of what FATCA is
about, because it applies to US investments, not clients. It
requires tax information for US clients, but it is primarily the
enforcement mechanism. If you think you can run a sophisticated
banking system with no US operation or investors, good luck!
What’s going to happen is there
will still be smaller jurisdictions, less sophisticated
jurisdictions which will take longer to deal with this regulation.
While we undergo this seismic change next year, it’s going to give
London an advantage because there is a sophisticated infrastructure
which can deal with it and can compete with other sophisticated
places, like Switzerland and Hong Kong. I think we will drive these
smaller jurisdictions and will tend to emphasise advantages of more
sophisticated jurisdictions over small ones.
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By GlobalDataPersonal tax is nothing more than a
system of regulation. One of the strengths of London is that there
is still a favourable tax regime. One of the weaknesses is the
number of changes. We see a lot of our clients and have to explain
it is still a favourable tax regime. But they say: ‘I’ve been
reading about all the changes, and don’t want to come anymore.’
What we really need is stability. The last government promised that
was the only change for the next two parliaments. This government
has announced this is the only change for this parliament. That is
almost as damaging as the relatively high costs we have here.
NM: Josh, I know your company
deals with a lot of American clients. IS FATCA taking a lot of your
attention?
Josh Matthews: Well
that’s basically the point of our Swiss business working with Swiss
banks that have American clients. A lot of Swiss banks said they
were not interested in working with Americans because the effort
and cost of being regulated in the US and Switzerland is too
high.
I think the industry in London also
benefits from being able to deal with clients from all over the
world in a very boutique niche environment. For example you have
Sharia banking, Americans, UK domiciles, UK non-doms etc. Few
countries in the world know how to deal with non-domestic clients.
I think, going forward, London will benefit from the changes in tax
laws and regulations. London is a lot more nimble than other
places. Even the US has very domestic client base whereas London
has a mix of international as well as domestic.
NM: Is regulation, including
RDR and the FSA’s increased scrutiny on wealth managers around sale
suitability, hurting business? Is the regulator’s tough post-crisis
stance threatening the attractiveness of London?
Nick Hammond, branch manager,
C Hoare & Co: There are two elements to it. In answer
to the first point, how can any efforts to increase suitability to
clients be a bad thing? The fact is increasing regulation is here
whether we like it or not. Yes, we can influence how effective that
is through lobbying, but it is still here nonetheless. So we have
to deal with it.
Is increasing regulation a bad
thing or an opportunity? I think good businesses will see it as an
opportunity, particularly on the suitability point. I think
different business models in the UK, historically investment and
wealth management firms, sought to differentiate themselves from
other business models, such as stockbrokers, through a much
stronger focus on suitability and risk, and identifying clients’
appetite for risk while maximising their level of return for that
risk.
Now everybody is being forced to go
down a similar route which means houses will lose their source of
differentiation. Is it possible that increased regulation in the
short term could weaken London’s position? Possibly in the
short-term, but equally increased regulation could increase
barriers to entry, which is a good thing.
The fact is we are going to see a
greater regulatory convergence. That has been gathering pace for
the last 10 or 15 years. If we get greater regulatory convergence
it becomes less of an issue globally as everyone is facing the same
change.
I suspect what it will achieve is
an opportunity for businesses to smash elements of their business
together and extract synergies.
Paula Elliott, moderator (PE):
What regulations are the most pressing for wealth managers, firstly
from a UK perspective and then a global perspective?
Selwyn Blair-Ford, Head of
Global Regulatory Policy, FRSGlobal: I looked at the PwC
survey that highlighted the list of regulatory concerns and they
are meeting tax transparency, regulatory convergence, enhanced
method and model laundering, and anticipated managing of increase
of regulatory requirements.
The list mixes regulatory policies
and items that are transitory with things that are significantly
structured. We will get used to the tax transparency, we will
eventually figure out which method is going to work.
Things that are more concerning for
running a bank are longer term issues. Things like convergence of
regulations across borders. We also have Dodd Frank, which is Basel
III-plus; a catch-all for quite significant changes. The other one
is Basel III in accepting and managing an increase in regulatory
requirements.
The thing to keep in mind for
people who run banks is that this is really the focus on prudential
reporting. Prudential reporting in this sense means talking about
risk and responsibilities that firms take on regarding risks of
managing their own businesses, and talking about capital and
liquidity.
Risk, capital and liquidity has
substantially changed in a way that is far more radical than even
tax transparency or MiFID. We’ve got a counter-cyclical buffer
coming in with Basel III to counteract bubbles. What this means is
that we’re going into an environment where there isn’t enough
information an individual institution can collect to be sure it can
predict the regulatory response.
If you have a regulator who is
looking at the whole system, and that regulator has determined that
the product xyz which you are selling is a bubble, you will not
foresee the slap on the wrist you’re going to get.
That uncertain regulatory
behaviour, which applies not just to UK regulators but globally,
means all regulators will be more intrusive and use judgement,
which radically changes the game. I really don’t think the industry
is taking this on board as a picture of how the world will be post
Basel III.
NM: Private banks have been
accused of an IT lag that puts them behind in the fundamental
systems needed to deal with these upcoming regulations. What are
your views?
Selwyn Blair-Ford:
The truth is that firms do not like spending money on the things
they think are less than revenue generating. There is a tendency
not to do it. As a result, what they tend to ask is: ‘How can we
minimise the cost of implementing systems and still keep it legal?’
What you’ll end up with is, instead of making life better you
reconfigure your silos into a set you no longer recognise. All
firms risk doing that. The good news is that a fair number of firms
do not do that and realise there is a link between stress testing,
reverse stress testing and liquidity capital.
They will go back at some point and
ask: ‘How can we encompass and handle this all in one?’
Gary Dugan: If you
live in a relatively unregulated environment, you almost hanker for
regulation. When trying to manage a business and front office,
having rules and regulations helps. London ought to think of itself
as well-regulated, protecting the customer environment, whereas
others do not live up to that.
The front office does not sell
regulation very well. Regulation gets a bad name because the
regulator is blamed for the utility bill approach, when it would be
better if the front office emphasised that it’s good practice to
know your client. Regulation can be a positive selling point for a
financial centre.
Chris Chambers, Head of
Investment Services, ABN Amro Bank: From a Jersey
perspective, one thing that helps Jersey thrive is that the local
regulator is respected, not only within the industry but also by
clients. Credit must be given to the Jersey regulator for avoiding
problems like BCCI, or letting similar disasters impact the
financial industry over recent years.
A selective approach to licensing
inspires confidence and is a major selling point in attracting
clients to Jersey. Regulation can and does work to the industry’s
advantage. Too often it’s regarded as all bad, but regulation is a
non-linear relationship. A cost benefit analysis would suggest that
at some point the benefits peak. The regulators and the industry
should seek to optimise at that peak. Too much regulation, and you
run into laws of diminishing return.
See also:
PBI Round Table: Complacency threatens London’s
status
PBI
Round Table: Selling global guidance
PBI Round Table: Preparing London’s pitch
