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How these regulation experts are preparing for a new era

A wave of regulatory change is hitting the financial services sector, with Mifid II, GDPR, the SMCR and Brexit all shaking things up. Tim Cooper discovers how PA Consulting Group’s David Biggin and Mike Teall are preparing for this new era.

Dramatic change

David Biggin, a financial services regulation expert at PA Consulting Group, has witnessed dramatic change since he joined the company as a graduate just before the 2008 financial crisis. But the pace of transformation has quickened since private equity investor Carlyle Group acquired a majority holding in PA in 2016. The new owner has brought a laser-like focus on growth, Biggin says. ‘The investment has been fantastic. It has been high-pressure and a gear-change for me and the whole business,’ he says.

This is the latest chapter in a long and storied history for PA. The business started in 1943 under the name Personnel Administration, helping companies improve their productivity. The company has come a long way from its wartime origins, training workers to make Lancaster bombers. It now employs 2,700 people and made £16.5 million profit in the year to December 2016.

'It is exciting to be in the middle of it and to see where the partnership takes us,' Biggin says. 'I value the incentivisation towards growth. But we are also looking at acquisition opportunities [including in compliance services], introducing new teams of people and services, and growing our existing capabilities.'

Dramatic change

David Biggin, a financial services regulation expert at PA Consulting Group, has witnessed dramatic change since he joined the company as a graduate just before the 2008 financial crisis. But the pace of transformation has quickened since private equity investor Carlyle Group acquired a majority holding in PA in 2016. The new owner has brought a laser-like focus on growth, Biggin says. ‘The investment has been fantastic. It has been high-pressure and a gear-change for me and the whole business,’ he says.

This is the latest chapter in a long and storied history for PA. The business started in 1943 under the name Personnel Administration, helping companies improve their productivity. The company has come a long way from its wartime origins, training workers to make Lancaster bombers. It now employs 2,700 people and made £16.5 million profit in the year to December 2016.

'It is exciting to be in the middle of it and to see where the partnership takes us,' Biggin says. 'I value the incentivisation towards growth. But we are also looking at acquisition opportunities [including in compliance services], introducing new teams of people and services, and growing our existing capabilities.'

Compliance takes centre stage

Although PA has many lines of business, its financial services compliance function was central to Carlyle’s growth plans. The investor anticipated a surge in demand in this area, driven first by January’s markets in financial instruments directive (Mifid II) and then from the forthcoming implementation of the general data protection regulations (GDPR), the senior managers and certification regime (SMCR) and other Brexit-related changes.

Carlyle bought 51% of PA, valuing the company at $1 billion (£750 million) at the time of purchase. The investment enabled the London branch of the firm to move into a stylish new office at the centre of Victoria’s Bressenden Place redevelopment, where Biggin is now based. The bright and airy building is dotted with busy breakout areas to give employees space to innovate – something PA prides itself on.

Biggin explains that Carlyle’s investment has allowed PA to ride the crest of the current regulatory wave, and the company’s valuation is growing in line with the targets set at the time of purchase.

But the cash injection was also crucial protection against acquisitive rivals. ‘The deal was to make PA much bigger through organic and inorganic growth,’ Biggin says. ‘As a mid-sized consultancy in a growing market, we could have been an attractive acquisition target. So we could either hunt or be hunted. The investment allows us to take our fate into our own hands and grow faster.’

Private equity firms usually look for quick exit strategies. Biggin says Carlyle has talked about a four- to eight-year investment timeframe, but it will reassess this as the business develops. ‘Selling to another private equity firm is most likely, but an initial public offering or management buyout are other options,’ he says. ‘Most PA staff are shareholders, so our interests are aligned with those of the board and Carlyle.’

Mifid II is not just an opportunity – it’s one of the biggest regulatory shake-ups ever to hit the asset management industry. It has driven huge demand for PA’s compliance services, Biggin says.

Despite some panic last year, most managers were prepared to comply with the bulk of Mifid II in time for its enforcement in January, he says.

'However, it’s not a smooth ride and there’s still work to do,' he adds. He highlights recent criticism of the Financial Conduct Authority (FCA) for failing to tackle firms that breached Mifid II rules on fee disclosure in its asset management study.

Knotty Issues

Biggin is now concerned with helping firms not just survive regulation, but also thrive by shaping their post-implementation strategy.

'Complying is one thing, but having an effective strategy in the Mifid II world is an increasing focus for us,' he says. 'For example, the regulations highlighted some costs of research that look high and might prompt an asset manager to change how they buy research.

'Also, the costs of complying with Mifid II transaction and trade reporting are high. It has been the knottiest issue, requiring an immense change and technology implementation programme. But I expect a further uptick in demand [for PA’s services] as asset managers shift their focus to finding the most efficient and effective operating model and a way to structure people, teams, relationships, customer bases and technology in the Mifid II world.

'Asset managers have not had regulatory change like this before. Large players were prepared earlier but in the past six months smaller players woke up to the need to develop a Mifid II strategy. They tend to be out of the regulator’s eyeline, but that [won’t last]. So there has been high demand from them, which will continue this year.'

Executive accountability

The SMCR, which aims to increase individual accountability for senior executives, will be another important regulatory 'game-changer' for asset managers when it comes into force, probably next year, Biggin says. 'The FCA sees it as a way to shine a light on the sector,' he says. ‘The cost of compliance is much lower compared with Mifid II and GDPR, but it has a high impact on senior managers’ time.

'It means even if they are not close to the activity, responsibility will rest with them, and enforcement activity is likely to involve them. So it places many pressures on senior managers. But it’s also an opportunity to improve business practices, such as around accountability, limits between you and your peers, controls and risk appetite.'

However, there is also a risk that it could make executives too cautious. 'It’s as bad to be below your risk appetite as to be above it,' Biggin adds.

 

Safeguarding data

The third regulatory wave for asset managers is GDPR, which aims to govern how customer information is held and used. Enter Mike Teall, the Edinburgh-based financial services and pension expert for PA Consulting Group, who covers this area. Teall says you would be surprised to see how seriously asset management firms are taking the data rules.

‘It doesn’t feel as though GDPR was intended to target them,’ he says. ‘Many asset managers have few direct dealings with retail clients, but they do hold information on their employees and on the businesses they deal with. They also have people processing information on their behalf, which they are still liable for under GDPR, and some do deal directly with personal customer information.

‘For some, mainly smaller firms, this has highlighted broader gaps in their control structure. For example, in how effectively they manage suppliers and understand the relational risks, regardless of GDPR. If cyber criminals attacked you or one of your partners’ personal customer data, that would be a commercial and a reputational risk.’

Teall says it has been difficult for asset managers to ensure their hundreds or even thousands of external partners have the right GDPR controls within the implementation timescales. Instead, they tend to prioritise the top 20 or 30 that hold the most sensitive or highest volumes of information.

‘Our current advice is about moving well beyond box-ticking towards a sustainable way of managing the risks. For example, incorporating them into an established governance framework,’ he adds.

‘My experience is clients need a new operating model for managing GDPR – a new team and processes to deal with requests to erase data and to maintain data inventories. Understanding the regulation is 30% of the task. The rest is knowing how to redesign your processes or implement technology around it.’

 

Continued demand

The regulators may give firms some time to consolidate after this tidal wave of change. Will demand for PA’s compliance services drop off once the regulatory waters subside? No, Teall says.

The FCA’s asset management market study suggested a wide range of remedies, many of which are still under consultation, but could turn into regulation, he says.

He also thinks Brexit will create significant demand by making the new rule changes even more complicated to implement.

'For example, most international fund managers move personal data between different countries. It’s not yet clear yet in GDPR whether, once we leave the EU, they will need new agreements to transport information from the UK to mainland Europe, and whether this will impact Brexit-driven location decisions.'

However, Brexit has not been all good for PA. Turnover fell by 4% for the wider group in the year ending December 2016 due to Brexit-related uncertainties, according to the company’s annual report.

Even so, Biggin says the financial services risk side of the business continued to grow during that time due to the increasing levels of regulation and market complexity.

Innovation and a competitive edge

Despite the Carlyle investment, PA remains a mid-sized consultant, and the question of how it can compete with larger consultancies remains.

Biggin says one selling point in the compliance world has been PA’s knowledge of the technology market. 'PA invests heavily in working with and understanding technology providers – for example, in Mifid II transaction reporting systems – so we can recommend them and support implementation,' he says.

'It has been a huge and growing market since 2008. That has also brought more competition. But PA has a history in innovation, whereas some of the largest consultancies have a history in risk and audit. In today’s market, there is an ever-increasing focus on innovating to succeed.

'Take regulatory technology. Financial services companies’ risk and compliance functions are significantly larger and more expensive than 10 years ago, mostly driven by increased regulation.

'If margins remain low and product differentiation is harder because of all this regulation, companies need to differentiate by efficiency and cost of service, especially post-Mifid II.

'But regulatory technology can help you do that, for example, through customer on-boarding, monitoring and risk data aggregation. These all lend themselves to innovative technologies such as machine learning, artificial intelligence and advanced analytics. PA also makes some of this tech. We work closely with other suppliers and sometimes spot an opportunity to develop something in-house that solves a need.'

Biggin would not say what regulatory tech the firm produces, claiming protection of intellectual property. But he highlights this overall approach has helped PA to be recognised by Source Global Research as the world’s second ‘most differentiated’ consultant, in a survey of 3,000 advice service users.

Another competitive edge, Teall claims, is PA’s close links to the FCA and Prudential Regulation Authority. He has good reason to make this claim, as the firm is used to carrying out work on the regulators’ behalf.

'We have worked closely with UK regulators in advising on their operating model and processes, and implementing major new regulation,’ he says. ‘We also conduct skilled persons reviews for both organisations. Through that work, we have been closely involved in the introduction of regulations such as the capital requirements directive IV, the alternative investment fund managers directive, solvency II and Mifid II. This knowledge and expertise supported the development of risk and regulation as one of our core offerings.'

Biggin adds: 'When I joined PA as a graduate in 2007, the financial services consulting business was largely about post-merger integration activities. But what a place it was to be on the day that Lehman Brothers failed, and the world changed. Since then, it’s been full of major, exciting changes.

'Thinking about how to help companies survive, cut costs, develop a risk and regulatory function that can withstand shocks, and understand and interpret the subsequent wave of changes, it has been fantastically interesting to develop expertise in a field that was previously unglamorous.

'I’ve seen PA go from strength to strength since then, and we are in a position now to prioritise growth.'

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