Conduct Risk Briefing

The reason we’re here today is to make certain that boards and senior management are taking a closer look at conduct risk. Conduct risk is a wide ranging topic and I want to use my time to focus on three areas, which I believe need further focus. I want take this opportunity to speak to you about three risks that I believe need to be discussed and looked at in more detail at boards and committees; Politically Exposed Persons (PEPs), anti-money laundering and sustainability.

What is important is we are all able to recognise the fact that the industry has changed. The focus is still very much on servicing your clients, but the ways to do this has developed significantly, with new technology and new products just two of the changes. We have to move with the times, whilst still ensuring good consumer outcomes. The industry has to think a lot more about how the service they are providing clients helps to build and maintain trust.

I use that phrase ‘trust’ because I think that’s the fundamental issue within the industry. Are we doing enough to earn that trust?

Trust

I use that phrase ‘trust’ because I think that’s the fundamental issue within the industry. Are we doing enough to earn that trust?

We all know what that situation is like with the relationship manager. Sitting down with them after spending a lot of time preparing and training them on how to engage, how to get information out of their client and how to profile them to ensure they’re getting the right services. You spend a lot of time and money training these individuals so they are ready to offer the right product or service to the client. That individual is sitting there thinking that they’ve possibly got some more funds under management coming in which should increase their revenue pool by a percentage if they can get this client to sign on the dotted line.  

And on the other side of the table is the client. Let’s say that either it’s an older person who’s retired, trying to figure out what to do with a pot of money that they have. That money is something they feel that they’ve earned; it’s a pot of money that they often want to have, not just for their pension but often to pass on to their children or possibly their grandchildren. The surveys that we have in our industry indicate that most of those clients are very anxious about whether or not they’re making the right decision. And they’re very anxious about whether or not the individual that they’re talking to is actually going to provide them with the right outcomes for them.

It’s that anxiety that those in the industry are not focusing on and not actually saying to themselves ‘this is how we’ve earned the ability for that client not to be anxious’.   What are we doing as an industry to assure ourselves that we have earned the trust of those clients who invest their money into our business? This all goes back to the fair treatment of customers, an issue which will not be new to you, and the culture within firms.

I also believe that what the wealth management and private banking industry has accomplished, in this country, is higher professional standards. It’s not just the industry alone that has done that; it’s also the regulators impact in the sector that has helped too.

When I look out onto the global world of private banking, I can put my hand on my heart and say that here in the UK, we do the best job possible in this industry. We have some of the world’s best professions in the UK. It’s the sustainability of this industry and its credibility in that I think is really important. We need to make certain that we do operate to the highest professional standards possible.

We are here not just to understand what conduct is, but to be taking these issues on board so that you can actually put your hands on your heart as well and say that you’re doing everything to the highest standard possible, and that journey is never going to end. That journey is something that we always have to be thinking about. What do we need to do better? What do we, as an industry, need to improve on? And what do we need to be concerned about as various risks hit the sector?

These issues really need to be at the top of the agenda within your board rooms.

Inherent risk: anti-money laundering and Politically Exposed Persons (PEPs)

I just want to spend a few minutes talking about some of the inherent risks that we see out there and what are probably the biggest two risks the industry faces reputationally. We have risks that are anti-money laundering orientated and we have risks that are exposed when we are dealing with high profile clients that we call Politically Exposed Persons

Investors are attracted to this city. They’re attracted to it for the stability, the ability to have a decent life, and the ability to avoid some of the troubles in the past. We have got to acknowledge that when something goes wrong, when we have allowed people into the system it shouldn’t have happened, we’re doing more damage to the long term reputation of the UK as a place to do this business than anything else.

And right now an issue that’s on a lot of our minds is, are we able to actually sort through the various client relationships we have to determine whether or not we’re doing business with any of the individuals that are currently on the list of customers that sanctions are to be applied to. And I know from running a business that it’s very difficult to do this. There are companies that are set up, there are trust structures set up, and for you to actually go through the various accounts that you have to determine whether or not those individuals are behind those structures is a very complicated task.

But at the end of the day PEP is not an issue that is going to go away, so firms have to assure themselves that those individuals are not transacting business through their institutions right now. Their accounts might be there, but firms are not allowing them to take any action and are not helping them as an industry to avoid these sanctions.

These issues really need to be at the top of the agenda within your board rooms. They need to be at the top of the agenda when your executive committee is examining some of the risks that are part and parcel of the industry right now. We don’t want the wrong people doing business through the UK. It is a problem.  We’re a very fragmented industry. We’ve got around 220 firms in this space, of which a number of them are actually foreign owned businesses with subsidiary companies here, have different policies, different anti-money laundering rules operating within their countries and also operating within their businesses. And some are more robust than others. It’s up to us in this room, whether or not you’re part of a standalone company or part of a global network, to ensure that the UK is not affected by these issues.

Will your business model be sustainable? Will your clients get the right treatment in the event that profits drop from where they are right now?

Inherent risk: sustainability

Then we go into some other levels of risk that we’re really concerned about in terms of sustainability. One of the biggest concerns that’s not always obvious to everyone, but is apparent when supervisors talk to firms, is how we’re always quite taken aback by the high cost to income ratios that you’re operating to. I know how tough it is to run these businesses, and I know there was a huge impact as a result of the credit crunch. And I’ve also realised that there’s been a lot of regulatory initiatives that have come about as a result of that to ensure that consumers are at the heart of your business models. And some may say that it is an additional burden. On one side, that’s a cost. But what hasn’t been occurring is a real thorough review of how the business models are able to meet the new standards and deliver a very good service to your customers. Again, coming back to the mantra of putting the consumer at the heart of your business model.

What that means is that, as an industry, we’re still trying to do a lot of the same things that we’ve always done and trying to build distribution capability the way we’ve always done it without considering the fact that it is a large cost. What’s different from the past is that we could always assume that the markets moved, it was going to bring us out of the profitability doldrums. This time around, we’re six years post the credit crunch and the market is back to record highs, yet as an industry we’re still suffering at high cost ratio.

There’s another aspect to this, and we as the regulator are concerned about this because if there’s another downturn, will your business model be sustainable? Will your clients get the right treatment in the event that profits drop from where they are right now?  The questions we want to ask you are these; are you prepared for that? And what would you do in that case?

From our perspective we’d be concerned if you were downsizing some of the oversight functions that are actually serving those clients right now, or changing their proposition fairly quickly without them understanding fully what impact this will have on them. There is another aspect which is ‘are we investing enough in the right technology to assure ourselves that we are quick, swift and part of the newly emerging modern world?’

The British Bankers Association (BBA) recently published a study which said that firms are not seeing a demand from their clients to invest into other types of distribution models, such as platforms. But remember, our data is also showing that the average client in your businesses is over 60. In fact, in some of your businesses, the data is showing us that your average client is over 70. And when we talk about sustainability we’re actually talking about what you are doing to make certain that you have the clients of the future.

All of you know that instant access is a very important thing for the younger investor, and we want to see firm’s continuing to service and treat their current customers fairly, but to also be more forward looking and explore ways you can start catering for a new generation. I can give you a very good example. My nephew has an app on his mobile phone. When I asked him about whether he is putting a pension together and saving for his future, he just pulls out an app and says every time he spends money on his credit card that $1.12 is rounded up to $2.00 and that $0.88 goes into an investment account. He’s a well-paid entrepreneur in his own right and puts a lot through his credit card. He managed to put, at 34 years old, about $50,000 aside and there’s a statement that comes along on his app, which said that with the current rate of charges on his credit card and current expectations in the market that he will have over $1,000,000 saved by the time he is 55. Now that is a whole different world from the one that we are operating in right now.

I’m not saying firms like yours need to move in to that space, but what we’re not seeing is the preparation in a lot of businesses for the world that’s coming up quickly. We see some firms taking stakes in innovative firms like that one, which is a positive move, but there’s only a few firms emerging right now in the UK that are providing that space and we need to see some more activity to make certain that we have more long-term, sustainable business models out there. With any changes, we expect firms to conduct their own due diligence and ensure that what they are adopting is suitable for their business model and, just as importantly, their clients.

Conclusion

To reiterate, the reason we’re here today is to make certain that our boards and our senior management are taking a closer look at conduct risk.  We want to see the businesses concentrating on consumer outcomes in all aspects of their business.

Clive Adamson, Director of Supervision, the FCA, uses an analogy that I quite like. He would like to see boards and senior management spending as much time on the firm’s financial circumstances as they do on client outcomes. It’s that understanding of the fact that every decision all of you make has an impact on customers. Sometimes it’s negligible impact, other times it can have a very high impact. What I don’t want to have is a world of private banking business leaders who have to be told all the time by the regulators that there’s a client outcome that you didn’t seem to foresee when you were discussing this particular initiative or this particular strategic decision, and why didn’t you see that.

I regard it as your responsibility to demonstrate how you and your team have discussed how any of the decisions you make with your team could impact your customers. It’s very important that we start to see this in the UK, as it’s going to make the private banking industry here different from the rest of the world, and that’s what’s going to give consumers even more confidence. We want to see businesses that are actually led by individuals that are asking the right questions at the right time before things become a problem.

I hope I have given you some food for thought on these areas of risk and take back to your Boards and Committees to discuss and assure yourselves that you will not be affected by them.