Regulation is prompting a re-evaluation of client relationships

THE UNPRECEDNTED WAVE of regulatory reforms sweeping markets across the globe has been most notable in Europe and North America, where legislative initiatives are affecting many aspects of the investment and financial landscape – from the process of selling financial instruments and products to the structure of financial institutions.

Private clients are certainly not isolated from the effects of this far-reaching regulatory overhaul, and the accountants, lawyers and wealth managers that advise these high-net-worth individuals (HNWIs) are all impacted.

This year’s World Wealth Report – produced by RBC Wealth Management and Capgemini, tracking the changes in global wealth and behavioural trends among high net worth individuals – included a survey of over 4,400 HNWIs that found, as might be expected in times of change, levels of trust in financial markets and regulators is currently relatively low. In the first quarter of 2013, only 45% of HNWIs had trust in financial markets and 40% had trust and confidence in regulatory bodies and institutions.

In Europe, a drive towards financial stability and greater investor protection have resulted in additional regulatory measures such as MiFID Part II, which enhances consumer protection by supporting transparency across a wide range of instruments and markets. Meanwhile in the US, Dodd-Frank has sought to protect consumer financial interests through far-reaching regulatory initiatives. Additionally, in a bid to combat tax evasion, the US government has introduced Foreign Account Tax Compliance Act (FATCA), which requires individuals to report their financial accounts held overseas. Many European firms may also have to comply with European versions of FATCA-inspired regulations, which would increase required due-diligence and reporting.

The new regulatory environment has the potential to effect significant positive change in the form of greater transparency, accountability of services, improved financial reporting practices and greater alignment of business services. However, the volume and pace of the reforms have the potential to be disruptive to the client-adviser relationship. Additional costs associated with compliance, the struggle to adhere to tight implementation timeframes, added to the volume of new regulation can pose a challenge for advisors. Clients, too, are feeling the impact of increased regulatory scrutiny in the form of increased demands for information and more demanding administrative processes.

However, despite these issues, advisors have an opportunity to play a major role in helping to rebuild confidence, guiding HNWIs through a period of regulatory change that is altering the industry landscape.

A new model for accountant-client relationships
As regulators seek to curb money laundering, tax evasion and related financial crime, the process of on-boarding clients have become more complex to ensure that enhanced Know your customer (KYC) and anti-money laundering (AML) regulatory guidelines are met. New rules impose stricter requirements related to identifying and knowing clients, which will inevitably incur administrative costs, but also change the nature of the adviser-client relationship.

In many cases, accountants may need to have more sensitive conversations with their clients. It will therefore be increasingly important for advisers to articulate the mutually beneficial nature of complete compliance with incoming regulation and ensure the right resources are in place – both in terms of technology and experienced personnel.

Accountants can use the new regulatory landscape as an opportunity to improve their communication strategies with clients so that constructive exchanges can take place and they can be more alert to client needs. Advisers also need to forewarn clients that more time may need to be spent on addressing regulatory issues. This clarity in communication will minimise disruption and also decrease any potential client frustration. It will further increase awareness and understanding of their own responsibilities in today’s environment, thereby resulting in better accountant-client relationships.

Clients, too, can play an important role in adapting to regulatory changes. Clients with a better understanding of the importance of compliance will find it easier to deal with additional requests for information, for example, ultimately facilitating more effective advice and solutions. In the long-run, their own risk exposure will be mitigated as a result of their advisors having strong compliance and transparency measures in place. However, it is up to advisers to communicate this rationale and, more importantly, to develop, communicate and meet client experience and service standards.

Firms that can make decisions and investments to incorporate the scope of regulatory change at a strategic, rather than a tactical level stand to gain the most both in efficiencies and an improved ability to meet and exceed client needs and expectations.

Julian Washington is a private client director at RBC Wealth Management

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