Conduct: supporting sustainable growth. Wealth and Asset Management

Transcription

1 Conduct: supporting sustainable growth Wealth and Asset Management

2 Contents Conduct is more than risk...1 Industry insight...2 Conduct is a global concept...3 Implementing conduct: our service suite...5 Risk culture...6 Conduct framework...7 Product intervention...8 Suitability...9 Digital conduct...10 Conduct risk management information (MI)...11 Our experience...12 Contacts...13

3 Conduct is more than risk Conduct needs to be layered into business strategy, not only to provide a fully scalable approach for future regulatory challenges but also to unlock strategic opportunities. Conduct risk has evolved to become an all-encompassing concept across the wealth and asset management sector, permeating every part of a firm and affecting every individual within it. At EY, we believe that conduct is more than risk it is the way your firm is run and the way you do business; it is who you are and what you represent. Set in this context, conduct becomes a supporter of performance and a differentiator in the marketplace, and the foundation upon which a firm achieves its ambitions. Recent history demonstrates that lack of an integrated risk framework may rapidly impact the bottom-line; triggered by advisor inertia at selling products through fear of regulation. This has also resulted in regulatory overrotation leading to commercial inefficiencies and bolt-on services primarily geared toward meeting conduct requirements. These issues may be easily rectified by embedding a cohesive conduct framework into the everyday business model. From a regulator standpoint, there has been a distinct tone from the FCA to promote more of a rules-based approach to embedding conduct-related issues in the strategic risk management framework. This new thinking requires firms to consider how the conduct agenda is reflected in their strategy and how it informs their decision-making. Wealth managers need to be confident that business activities place best interest of the customer at the forefront of what they are doing in order to provide value at the strategic level; which needs to be further evidenced by a strong conduct approach to the wider market they operate in. We see a compelling case for industry participants to incorporate conduct risk into their business strategy and achieve balance between risk governance and strategic opportunities. Our view is simple placing good conduct should be at the heart of a firm s business model, promoting a robust risk culture. This would deliver the right advice to the right customer, enhancing their experience and supporting safer growth. Our comprehensive suite of services enables firms to take advantage of this opportunity and demonstrate that fair customer outcomes provide the foundation for their success. We recognize the complex responsibilities firms have to customers, shareholders, employees, regulators and society as a whole. We believe that conduct is the vital ingredient that supports firms to deliver across all of these, rebuilding trust and delivering sustainable growth. Simon Turner Executive Director Regulatory & Risk Lead, Wealth & Asset Management Advisory Tel: sturner@uk.ey.com 1

4 Industry insight Regulators have signalled a particular focus on conduct risk and the drivers of culture, upholding the integrity of markets, and intervening earlier in the value chain in order to drive better outcomes for investors. The FCA defines conduct risk as the risk that an entity mistreats its customers, staff or clients, causing them detriment. Key business priorities In a recent EY Wealth and Asset Manager Risk Management Survey 93% of respondents indicated that conduct risk was one of their top five risks. Firms who demonstrate both client centricity and business agility in order to manage change effectively (through system flexibility and efficient data inventory) could likely count themselves among the wealth manager winners of tomorrow. Determining product suitability and providing advice to clients have been on the regulatory agenda since MiFID I took effect, but they are increasingly a focal point on regulators agendas. Investment strategy, suitability and appropriateness, and disclosure have been fundamental to confirming client centricity, however, not all wealth managers have tracked their clients risk appetites effectively; so there remains a real risk of clients continuing to invest in products that may not meet their investment objectives. 93% of respondents indicated that conduct risk was one of their top five risks Key risks identified by wealth and asset managers Managing the volume and complexity from overlapping regional and local regulatory measures. Managing risks arising from conduct (of business) Mitigating reputational risks were the prime motivations for asset managers, wealth managers and private banks alike. Wealth management firms particularly focussed on regulatory risk broken down into terms such as compliance risk, product risk and suitability disclosure risk alongside other key risks such as reputational risk and model risk. In general, wealth managers placed greater emphasis on aligning the client risk profile with the underlying product risk scorecards and improving their risk management capabilities (risk indicators, controls, registers) to create better alignment with their goals of growing the business; creating sustainable margins and improving the client experience. Figure 1: What is top of CRO s agenda? Key RM4AM Survey 2015 RM4AM Survey 2014 Regulatory risk (multiple regs) Operational risk Regulatory risk-conduct Reputational risk Liquidity risk Counterparty credit risk Investment risk Outsourcing risk Market risk Tech risk (data) Business/model risk Mandate risk Tax risk Tech risk (current) Country risk Legal risk Custody risk Enterprise risk Key: RM4AM Survey 2015 RM4AM Survey = 1 1= 3 3= 4= 4= Source: EY Wealth and Asset Manager Risk Management Survey % 95% 93% 90% 90% 2

5 Conduct is a global concept While originating in the UK, the conduct concept can be seen throughout the global regulatory developments of which firms around the world are becoming acutely aware. Far from isolated deals with foreign clients, this impacts cross-border businesses and firms with international presence setting good customer outcome as a default expectation from retail and corporate clients from around the world. Europe The European regulatory reform program is fast becoming a reality that will transform the investment industry. Alongside EMIR, CRD IV, structural change and Solvency II, MiFID II is one of the key regulatory initiatives standing on three pillars of the market: structure, transparency and investor protection. The significant implications of the new regulation is on how the firms conduct themselves and behave towards their customers. Hong Kong Recently, the Hong Kong Securities and Futures Commission commented that it will hold senior managers at regulated firms in the territory to account as part of its focus on conduct risk. The regulator s Code of Conduct for Persons Licensed by or Registered with the SFC was important to confirming firms had a high standard of conduct in the capital market. The code outlines the regulator s expectations for orderly conduct in the Hong Kong market, and breaches are often cited in the SFC s enforcement actions. South Africa The new twin peaks regulation combining prudential and conduct directive covers market conduct requiring higher standards than general consumer protection laws, reckless lending practices, excessive fees and unfair product terms. The treasury has also released a draft market policy framework open to discussion until April 2015, being the first attempt to draft the framework around how market regulator should operate with the aim to treat customers fairly. United States All regulatory bodies, including Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC), are demonstrating a commitment to improving conduct within the industry. However, conduct implementation shows a more prohibitive pattern than the rest of the world, driving firms to limit their liability when selling the products and services to customers rather than aiming for the best customer outcome. The Department of Labor (DOL) is expected to publish the so-called fiduciary standard in 2016 It will help to promote transparency and protect investors from being sold unnecessary financial products that increase broker commissions and create conflicts of interest. Australia In 2014, Australian Securities and Investments Commission (ASIC) identified conduct as one of the main risks for Australian financial services industry. It has taken disciplinary action against a number of individuals who had made false statements to consumers or provided unsuitable advice. In most cases, the individuals concerned are, for a specified period, no longer permitted to provide financial services. The Future of Financial Advice (FoFA) reforms came into force in Australia in July The reforms comprise a range of measures intended to improve the experience of retail consumers when receiving financial advice. ASIC is developing strategies to address conduct since Source: Conduct Risk Report 2014/15, Thomson Reuters 3

6 Our services are designed to guide you through each step of the process in implementing conduct as your everyday way of working 4

7 Implementing conduct: our service suite EY views conduct as a driving force to delivering strategic growth, via improving customer trust building loyalty, strengthening the overall customer base. A robust conduct framework should help enable good customer outcomes which remain at the heart of your proposition. Conduct risk MI Supports senior management oversight and control across day-to-day running of business, new launches and compliance Demonstrates effective conduct risk management Product intervention Shows how to design the right products for the right people to deliver fair value Streamlines the manufacturer/distributor relationship Digital conduct Explains what risks firms need to be mindful of in the new technology-driven market, as well as how to address those risks Risk culture Explains how to place conduct at the heart of how the business is run Shows how to improve and sustain appropriate risk culture among people in your organisation Suitability Demonstrates how investment transactions, asset allocations and underlying investments can be structured within the portfolio to deliver good customer outcome Conduct framework Demonstrates effective identification, management and mitigation of conduct risks across the whole business Figure 2: EY s service suite 5

8 Risk culture Risk in firms is managed by people, therefore their behaviour can have a significant impact on the effectiveness of risk management. Culture is the sum total of people s behaviours it is the way we do things around here. Managing risk culture is complex and involves many tangible and intangible factors. The key to progress is working on things we know we can change. What are the key questions you should be asking yourself? Does the board devote enough time to conduct risk as an agenda item? Does the tone from the top cascade through the management chain to the front line? How important is good conduct in recruitment, remuneration and retention? Are employees appropriately trained? What behavioural outcomes do you want to achieve? How do you assess risk culture in your business? How can financial institutions improve risk culture? Our EY framework outlined in Figure 3 can be applied to wealth and asset management firms and used for risk culture design, assessment and monitoring purposes. By incorporating the requirements for conduct within the risk culture mechanisms, it can produce healthy behavioural outcomes where employees are aware of their roles and responsibilities and they are the ones driving the risk culture from within the firm. Figure 3: Risk culture mechanisms This framework is explained in our short YouTube clip: youtube.com/watch?v=yyeasw3diti Incentives Employee life cycle Tone from the top Leadership Advocate Lead and influence Rewards Risk behaviours standards Adaptable Analyse and interpret Mechanisms Behaviours Risk transparency Roles and responsibilities Communicative Responsibilities and aaccountable Risk framework Risk appetite Risk governance Organisation Ethical and compliant Coliaborative 6

9 Conduct framework EY believes there are key questions that should be considered to assess the strength of your existing conduct risk framework. What are the key questions you should be asking yourself? Do you explicitly consider conduct risk in the setting of your strategy and business plan? Is there clear ownership of conduct risk throughout the organisation? Can you evidence that conduct risk is given the right level of consideration and challenge at a board level? Figure 4: New areas of the conduct risk framework to consider: culture, ethics, business models and strategy Proactive Do you deal proactively with issues and learn from mistakes? Complaints Is a robust complaints handling process in place? Training Are employees appropriately trained? Tone from the top Does the tone from the top cascade through the management chain to the front line? Culture and ethics Board agenda Does the board devote enough time to conduct risk as an agenda item? Voice of the customer Is there adequate encouragement of and response to feedback? Recruitment and incentivization How important is good conduct in recruitment, remuneration and retention? Reliability Is your infrastructure reliable and resilient? Customer and market impacts Do cost and operational decisions consider customer/ market impacts? Ownership Is there clear first line ownership of conduct risk? Capital Business How do capital models management decisions and affect customers? strategy Value for money Do products/services provide reasonable value for money? Strategy Does your strategy or business plan include explicit consideration of conduct risks? Transparency Is it clear where you make money? Segmentation Is segmentation based on customer needs and consistently applied? Customer need Do products/ services meet customer needs? Building a framework A top-down approach whereby clear vision, overall strategy and direction is set at board level is favoured. Figure 5: An example of how to build a framework Conduct framework A bottom-up approach addressing individual components of the risk management framework and reporting into the governance and oversight framework can result in undue focus on the current state. Peer firms are also confirming that the development and implementation of conduct risk frameworks support commercial imperatives rather than solely focusing on back-book/regulatory issues. Conduct risk definition/tolerance Governance Risk and strategic oversight Senior management responsibilities Risk identification, mitigation and management Assessment, review and challenge Roles and responsibilities of the second and third lines of defence Review of conduct behaviours Objective setting and performance measures Escalation and reporting Practical implementation of the framework 7

10 Product intervention Review of product development and life cycle is an opportunity for firms to understand their target market, check whether current product life cycle aligns to the target market and products being manufactured are reaching this market. The FCA expects firms to address all parts of the product life cycle (see Figure 6) in their product governance arrangements, including relationships with the product manufacturer and distributor and customer segmentation strategy. Firms need to demonstrate that they have tested their products not only at launch but on an ongoing basis to identify product features that may cause customer detriment, and that mitigating actions are taken. A firm should be looking to build into its product business model and strategy post-launch reviews and feedback loops to confirm the product is working in practice and getting to the right people. A Firm should also have ability to remove products in response to imminent customer detriment. Following this approach will also enable MiFID II compliance. Figure 6: The product life cycle Product development What are the key questions you should be asking yourself? Business Who is your target market and why? What is the rationale for the products being sold? Closure Investor level risk How do you know your product reaches the your target customer? Can you articulate your value proposition? Corporate level risk Risk and strategy Product level risk Product launch What are the systems and controls a firm has to confirm the product is meeting the desired objectives? Do you utilize a proactive client feedback loop for the ongoing development of products and services? Model Model Product review Business Product life 8

11 Suitability For wealth and asset managers, a strong, firmwide approach to suitability is key to building client confidence and trust. Across the client journey, firms should confirm they have a robust process to determine and document their clients financial goals and appetite for risk. The advice process should be consistent and its objective aligned to the most up-to-date know your customer (KYC) information gathered through the ongoing review process. Aside from providing compliance with the AML requirements, the right information would enable a better understanding of your clients, encompass personal and financial situations, as well as knowledge and experience. What are the key questions you should be asking yourself? Do you have an objective and consistent mechanism to determine the client risk profile? Does your product risk scorecard capture the intrinsic risk of each product and align it to the client s risk profile? What is your capability to monitor ever-changing products performance and the client s risk profile? Do you have a proactive response approach to changes in product and customer profile to help confirm the advice continues to be suitable? Figure 7: The client journey stage Ongoing review Prospecting 5 Ongoing mointoring 4 Undertake service selection 1 Client investment suitability Product recommendation 3 Gather client s KYC 2 Establish client s risk profile Onboarding Figure 7 highlights our suitability risk framework and the linkage between the end-to-end client journey and the key activities undertaken by the advisor. 1. Undertake service selection Understand which proposition would potentially suit the client (advisory, discretionary, execution only) and their history and background. 2. Gather client s KYC Understand the client background, profile, objectives and financial needs. Confirm you capture their goals and priorities. 3. Establish client s risk profile Using the client risk scorecard to understand capacity to bear loss, attitude to risk, investment knowledge and awareness confirming the approach is always consistent. 4. Product recommendation The recommendation is supported with underlying asset allocation. The choice of products and level of risk should be clearly correlated to the client s overall risk appetite. Servicing 5. Ongoing monitoring Captured at three key levels: Client-level risk monitoring Portfolio-level risk monitoring Transaction-level risk monitoring 9

12 Digital conduct As the digital landscape evolves, it introduces new consumer behaviours as well as new risks that can arise from conducting business. In a digital environment, EY believes that wealth and asset management firms not only can be better equipped to manage new risks by understanding how these can arise throughout a customer s relationship with a firm; but also how they can innovate and grow using technology to make a cost-effective improvements to its processes. For the second consecutive year, in its annual business plan, the FCA has identified technological development as one of its forward-looking areas of focus for 2015/16 and, as a further acknowledgement of the growing interest in digital as a low-cost distribution option, the FCA has begun to review the boundaries, through scenario analysis, of advice in the digital distribution market for retail customers as providers, fuelled by customer demand, seek more clarity. As a guiding principle, outcomes should always deliver the fairest service for the client regardless of distribution method. Digital, like any other channel, should have good conduct principles behind it, whether serving a simplified self-selection model or supporting a full advice proposition. Figure 8: Considerations for a wealth and asset manager using decision trees for online distribution Regulated investment advice Suitability assessment considering customer s personal circumstances Specific product or a list of products identified as suitable and recommended, explicitly or implicitly Next steps recommendation Advice given through some public channels (e.g., social media, newsletters) can form a case of personal recommendation. Criteria Suitability questions Type of deliverable Advice on actions Self-selected investment advice No specific suitability and no reference to personal circumstances A range of options, neither of which identified as suitable, are given to the customer The customer to decide on next steps Public advice available for all is not a personal recommendation. Source: Non-exhaustive list of criteria based on the FCA guidance paper FG 15/1, January 2015 What are the key questions you should be asking yourself? Are there parts of your value chain where you can utilize digital (e.g., client profiling, risk appetite questionnaires, simplified advice)? How do you confirm suitability in online sales? Does your distribution model aim to deliver best customer outcome? How do you evidence that your digital business is conducted fairly? 10

13 Conduct risk management information (MI) Conduct risk management information (MI) provides actionable insight to support management in executing their strategy in line with their risk appetite. Relevant conduct metrics, if embedded alongside traditional business metrics, can help establish focus and delivery of fair consumer outcomes. A rounded approach to data discovery with relevant KPIs will shape real business insights and inform the management of the root-cause affecting the performance results, as well as understanding performance of the newly launched initiatives. At EY, we have developed a conduct MI service that can be tailored to the needs of your firm providing different detailed levels and perspectives to enhance conduct insights What are the key questions you should be asking yourself? Do you have a view of conduct performance in your sales metrics? How do you know that the growth you are experiencing is safe and sustainable? How does your MI help you anticipate the future impact? Does your MI enable the robust discussion in your board? Figure 9: EY s conduct risk MI service Performance visualization displays graphs, charts, tables and commentary. Apr May Jun Jul Timeline allowing comparison between periods. Business snapshot displays a number of key risk attributes in the dashboard, helping the user understand where there may be significant conduct risks, in any given geography or business division. In our approach we split the make-up of the business into four dimensions ; customer type, line of business, distribution channels and regions. KPI filters provide the list of available dimensions of analysis to update the performance visualization area. Graphic representation of core KPIs, allow easy identification of risks and trends, supporting further drill down to next level of KPIs. Conduct risk profile presents a current and historic snapshot of the total product risk, e.g., product complexity; sales risk; customer risk, and service risk. 11

14 Our experience We have worked extensively with firms and the FCA on product and pricing matters and we bring considerable experience on regulatory matters across the financial services industry. Market recognition: In late November 2014, EY was recognized for compliance and regulatory excellence at the Compliance Register Platinum Awards 2014, which started in 2004 to recognize exemplary service to compliance and regulation, and to raise funds for various selected charities. The winners are determined by a vote from members of the Academy of Compliance Excellence (ACE), which is an independent body with strict rules of impartiality. Winner: Best Consultancy/Law Firm Conduct Risk including CASS Significant contribution: Best Consultancy/Law Firm Regulatory Change Management and Financial Crime Compliance Working with the FCA on conduct risk Our team includes former regulators including from policy and supervision areas of the FCA, in addition to experienced industry practitioners; and we have worked with the FCA on a number of its key initiatives. So we have both insight into the regulatory approach as well as practical experience of implementation. We also regularly host industry events focusing specifically on the conduct risk agenda, promoting dialogue between the regulator and industry participants. Working with firms on product governance and conduct risk We have continued to support the roll out of the conduct risk framework for clients across the FS industry either supporting roll out of the overall conduct risk framework or working with clients on specific aspects of their conduct risk agenda. We have also worked across the product life cycle, supporting clients to adopt a strategic approach to conduct risk. This includes working with clients to predict where conduct risks may emerge, to pre-empt issues in executing their strategy, as well as supporting clients in rectification exercises where conduct risks have crystallized. FCA Skilled Persons Panel * We are on the FCA s panel for Skilled Persons (S166) reviews, to enable the FCA to confirm a consistent, high quality and transparent approach to conducting Skilled Person Reviews. This includes being on the panel for Lot 5 (Conduct of Business), which is summarized by the FCA as consultancy advice and expertize in assessing quality of advice, sales practices, complaints handling, conduct of business rules and guidance, treating customers fairly, arrears management and retail conduct risks associated with each stage of the retail product life cycle. 12 * Source: Conduct: supporting sustainable growth January 2016

15 Contacts # Alex Birkin Partner Global Wealth & Asset Management Advisory Leader Tel: abirkin@uk.ey.com Gillian Lofts Partner UK Wealth & Asset Management Leader Tel: glofts@uk.ey.com Keith MacDonald Partner Head of UK Advisory Wealth Management Tel: kmacdonald@uk.ey.com Simon Turner Executive Director Regulatory & Risk Lead, Wealth & Asset Management Advisory Tel: sturner@uk.ey.com Dr. Anthony Kirby Executive Director Head of UK Wealth & Asset Management Regulatory Reform Tel: akirby1@uk.ey.com Himanshu Patel Senior Manager Risk & Regulation Wealth & Asset Management Tel: hpatel7@uk.ey.com Haney Saadah Senior Manager Risk & Regulation Wealth & Asset Management Tel: hsaadah@uk.ey.com # Ernst & Young LLP 13

16 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com EYGM Limited. All Rights Reserved. EYG No Gbl indd (UK) 03/16. Artwork by Creative Services Group Design. ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com