The past few years have been marked by profound regulatory change, with many joking that it has become a golden era for those working in compliance or regulatory consultancy.But this is no real joke as the hefty cost of compliance teams and the consultants that support their policies is weighing on the profitability of a number of wealth management businesses.
Charles Stanley is a prime example. The national wealth manager issued a profit warning in April, pointing to post-retail distribution review (RDR) consultancy work and other ‘exceptional professional fees’ that increased one-off costs over the 12 months to the end of March. Ultimately, pre-tax profits slumped by 33% to £6.1 million over this period as other factors, such as the cost of its Evercore Pan Asset acquisition and a £1.2 million FSCS levy, also came into play.
A closer examination of the issue suggests a portion of the sector is actively engaging with external consultants as firms get to grips with the RDR, the Financial Conduct Authority’s suitability review, new client asset rules and the Foreign Account Tax Compliance Act (Fatca), to name but a few.
It is logical to enlist the help of specialists to ensure firms are compliant, particularly as there are instances where rules are noticeably open to interpretation and the threat of enforcement lingers. However, there are some potential pitfalls.
First, accountability. It is the firm that remains ultimately responsible for compliance with rules, not the consultants, so it is up to the compliance and management teams of the business to ensure they have got things right.
‘There is an absolute risk that they are a consultant and not the regulator. Even if you use a consultant who has worked for the regulator, they are not the regulator and you do not have a get-out-of-jail-free card. It is an expensive one at that,’ said Quilter Cheviot director Jane Seymour.
She warns management teams risk becoming paralysed due to an overreliance on consultants, a trend she has picked up on in other sectors.
Her firm has enlisted help from consultants on projects such as the RDR, the Client Asset Sourcebook (Cass), charging, Fatca and the funds business that was inherited from Cheviot. However, she said these were led by Quilter Cheviot’s 15-strong compliance team and consultants are used pragmatically as a sounding board.
‘We use a range of consultants, depending on the expertise we need. We have got a good core team but we are not experts in everything,’ she said.
She estimates the firm has spent in the low hundreds of thousands of pounds on regulatory consultants, representing ‘a tiny proportion’ of revenues, which stood at £128 million at the end of 2013.
Courtiers’ chief executive Jamie Shepperd estimates his firm has spent £200,000 on external consultants. Total regulatory spend, inclusive of Financial Conduct Authority (FCA) fees, equates to 15-20% of its revenues of £8 million.
‘I would be more worried if I went into a company and they did not have any outside assistance than if they had significant outside assistance. It is good practice to have third-party eyes,’ Shepperd said.
Courtiers uses law firm Bond Dickinson to do so-called ‘deep-dive audits’ and to check the suitability of portfolios, while accountant Bishops Fleming has been used to assist with the firm’s Cass policy. Depositary Citibank and its auditors Ernst & Young also carry out deep-dive audits for the company.
‘We have selected three different consultants so we are not putting all of our money into one firm,’ he said.
‘They are here to do the audit and it is not about them being kind and friendly to secure the revenue. They need to do the audit and tell us if we have done things wrong and where we can make improvements. It is something we have been doing for more than three years now.’
Paul Chavasse, Rathbones’ head of investment management, said his firm prefers to tackle projects in-house. He said a very small percentage of compliance budget is spent on consultants, who tend to do ‘little bits of consulting around the edges to make sure we are on the right lines’.
‘It is not a major feature. We have always tried to take the view that management are there to manage the business. We call on people for help rather than getting them to run the business.’