Wealth firms spend 10% of income on regulation

The wealth management industry spent over 10% of its total income on compliance costs alone in 2011, part driven by an 11-fold increase in spend relating to the suitability review, according to Compeer.

The benchmarking and research group estimates that £416 million was spent on compliance costs in 2011,comprising of direct costs of £211 million and a similar figure of £205 million in hidden costs, including aspects such as senior management time.

The findings are based on data relating to 15 large wealth management firms, who manage 24% of industry assets.

Perhaps most worrying was Compeer's estimate that year-on-year hidden compliance costs in 2011 were boosted by a 32% rise in costs associated with senior management time, 50% for office professionals and 11.3% for other departments.

Commenting on the findings, Mike Levy, Compeer's business development director, asked wealth management business: 'How would your firm perform if these guys did not have to spend time on compliance?'

Costs associated with projects relating to the oncoming retail distribution review (RDR) increased by 51% over the year to just over £600,000, while the FSA's suitability review contributed to an 11-fold increase in spending to around £100,500.

'Firms face a nasty shock when it comes to the Foreign Account Tax Compliance Act (Fatca),' Levy added, with an associated spend around the £20,000 mark.

Compliance costs for private banks were the highest in 2011 at £470 per £1 milion in assets, while execution-only brokers incurred costs of £140 per £1 million.

Client reaction

While consumer protection has been a key driver of regulatory change, Compeer noted cynicism and dissatisfaction in relation to attitudes towards the regulator among a sample of 300 high net worth individuals.

Just over 40% of the sample said they were very unsatisfied or unsatisfied with the way the wealth management sector is regulation, while 69% expect compliance costs to be passed on to them. Meanwhile, only 29% felt regulatory changes have resulted in them being treated more fairly.