Regulation: a torrent of trouble for wealth management

Mark Taylor is managing director of Equiniti Investment Services

Regulation is a key driver of change on IT strategies across the wealth management sector, as highlighted in a recent report from Compeer, Using IT to Deliver Scalability and Efficiency for Wealth Managers. Regulation brings with it huge challenges, especially for smaller players, and predictions are that the cost of compliance may rise by a further 16% by 2015, writes Mark Taylor.

From recent Equiniti commissioned research we have identified that 38% of the senior wealth managers have already changed their view of outsourcing the back and middle office due to regulation and 32% think the impact of regulation is an argument for further outsourcing.

In the face of this continuing blizzard of regulatory change, driven both domestically as well as from Europe, will the industry’s IT departments be able to keep pace with what is required? Perhaps.

The more important question on which to focus is this: do we as a sector understand the impact regulation is having upon business processes, in ways that ensure a company’s IT strategy is properly formulated, fit for purpose and sufficiently robust to be an integrated part of the business process?

It seems that the impact of regulatory change varies by business. Some CEOs think regulation has less of an impact on IT than on other business processes, while others find it hard to keep up with the pace of change. Then there are those who have tried to capitalise on the need to make change, by gathering together other developments with the mandatory aspects demanded by new regulation.

It is evident that where an IT strategy has been developed, corporate strategy and IT strategy seem to be interlinked. But it is also clear that IT strategy is often seen solely as a support function, instead of having an explicit strategy of its own. The IT function is seen as something that can easily be scalable if required, or outsourced if that is judged as being the most viable approach.

As I write, I am preparing to attend this year’s Sibos conference where 7,000 delegates will discuss, debate and formulate the future of the global financial services landscape. On reading through outline presentations, it occurs to me that we are talking about a global financial services world in which companies do not just have a footprint in many countries, but a method of operation that is truly international, as is the regulatory structure in which they work. Central to this new world order is the desire by many domestic and pan-country regulators to “harmonise” regulation. Some of the biggest elements of legislation are yet to come – The Securities Law Directive, Market Abuse Directive, EU corporate Governance Framework and EU transaction Tax to name but a few. All will require not only business process change but IT redesign too.

This regulatory change is set against the backdrop of a very gradual return to form following a very deep recession. In recent years, many financial services reacted to the recession by cutting back on their IT investment. Many regulators are reacting by reviewing their responsibilities and reach. As a result the industry as a whole should be deeply concerned at the capacity restraints that will emerge as a direct result of the volume of change that is already apparent and gathering on the horizon.

I predict that the full extent of the regulatory proposals we are likely to face will bring about an IT and management skills shortage. Business analysts will have to translate the impact of the changes while project managers co-ordinate initiatives and agendas.

Companies that have lacked the luxury of horizon planning for the last two years are unlikely to have spelled out the impact of these regulatory changes and what they mean in terms of business process changes or solution designs. Added strains will also come as managers try to rationalise the spend required to meet the costs of these developments which, on the whole, will be difficult to justify as they do not necessarily lead to increasing business revenues but simply keep the business solvent.

And safe from fines.

Predicting the future is not a precise business but of one thing we can be certain. This is all going to happen. If you do not have a strategic plan that brings together an impact assessment, solution design, solution build and test, agreed between management and your IT department, you may already be too late. I look forward to meeting all those SIBOS attendees looking for the best way to balance the risk and rewards of IT spending, and debating the best ways to plan ahead, resource wisely and to best effect.