Retail Distribution Review
Written evidence submitted by J P Morgan
Retail Distribution Review ("RDR") - Global Private Banking Perspective
We are writing in response to the UK Treasury Select Committee's "call for evidence" in relation to the Financial Services Authority's ("FSA") RDR proposals.
We have reviewed and considered the detailed provisions set out in the March 2010 Policy Statement (PS 10/6) as well as in the more recent Consultation Paper on Platforms: Delivering the RDR (CPIO/29 - November 2010). In October 2009, we wrote to the FSA outlining our concerns with these proposals from a private banking perspective as part of the RDR consultation process. We attach a copy of that letter for the consideration of the committee [not published]
.
The recent House of Commons debate on the RDR (29 November 2009) concentrated on the impact the RDR will have on the UK IFA market which we appreciate is the primary focus for the new regulations. We understand the need to enhance the training and competence of UK financial advisers and to mal<e the disclosure of fee income more transparent to the customer. We can see clearly that certain of the RDR proposals should benefit the UK consumer market, such as the professional standards requirements, and we support these proposals.
We now think it is timely to focus on the impact that the RDR will have on the clients of UK-based private banks and wealth managers. For private banks or wealth managers with an international sphere of operation, who have a major presence in the UK or who have chosen to locate their European headquarters in this country, we feel that there are a number of potentially damaging unintended consequences that will occur as a result of the proposals in the RDR on advisor charging.
Our client base, in common with other UK-based private banks, consists of high net worth ("HNW"), individuals and families. Our clients typically are highly mobile and have multiple relationships with private banks around the world and may ovvn homes in a number of countries. Our clients typically have high levels of financial sophistication and employ professional financial advisors. Their financial needs, the types of products they seek and the terms under which they are prepared to pay for advice are very different from the average UK consumer.
Our clients will typically compare services and pricing of different private banks across multiple jurisdictions. All other factors being equal, such clients would be as happy dealing with a private bank in Paris, Geneva or Singapore as with a UK-based private bank. Generally speaking, our clients are attracted to the UK as a financial centre, due to its well developed capital markets, the security of the banking sector, and the level of service and expertise they receive in London. However, we are concerned that the RDR proposals will place the UK-based private banks and wealth managers at a considerable disadvantage to their non-UK based competitors in other EU member states and beyond.
Under the proposed changes to the advisor charging rules, regulated firms will no longer be able to accept trail fees from funds, even if they are appropriately disclosed to clients. If RDR has the effect that the global funds industry moves to develop RDR compliant products, then we can see that a key step forward will have been achieved in terms of fees transparency. However, we believe that there is a considerable risk that the majority of non-UK funds will not restructure their products in line with RDR and clients are unable to invest in such funds. This will have the effect of limiting the range of products available to UK-based investors. Alternatively, the funds could retain such fees in relation to UK clients, thus making the funds more expensive for a UK client than a non-UK client. As this regulation will affect UK clients only, UK based private banks will need to apply different fee charging schedules to UK clients to those outside the UK.
It is our expectation that our clients will simply seek these products through alternative means, such as via a non-UK private bank, particularly those clients wishing to invest in hedge funds and private equity funds. These are generally offered on a global basis and UK investors are only a small proportion of the global offering. It may be the case that these product providers offer no RDR compliant solution and, therefore UK-based clients are tillable to invest in them. These are niche products, sought after by HNW clients, and we feel that they should be exempted from the products in scope for RDR. As the FSA acknowledges, the RDR proposals in relation to advisor charging are super-equivalent to those stipulated in the applicable EU legislation and no other EU state has transposed MIFID requirements in this manner to date.
The extent of the problems being created by RDR for a global private banking group, such as JP Morgan Private Bank is laid out in an Annex to this letter. Please note that the figures contained in this Annex are market sensitive, and we would be grateful if you could treat them as confidential [not published].
In addition to the restrictions on fees, which will lead to restrictions on fund offerings to UK clients, there will be substantial costs associated with developing operating systems that capture the changes proposed under the RDR. These new systems will need to distinguish between clients in scope for RDR, typically clients based in the UK, and those outside the UK, and therefore out of scope. The FSA has failed to provide a clear definition of clients in scope, so firms are obliged to take a conservative view. This is a particular problem when dealing with clients who only stay in the UK for part of the year.
We feel that the needs of the UK private banks and wealth managers and their clients have not been given due consideration by the FSA. Furthermore, we are finding it difficult to fully comprehend and assess the consequences of RDR due to a lack of clarity in a number of areas, including the following:
• Whether discretionary client accounts are in scope for RDR;
• What is the range of investment products captured by RDR;
• What is the definition of "Advice" in the context of RDR, and how can this be
distinguished from a client relationship which is purely "execution-only";
• How the advisor charging elements of RDR can be accommodated in a private
banking relationship.
The lack of clarity on these points and the clear disadvantages faced by UK-based private banks means that any planning for the RDR is extremely difficult and costly in terms of management time. We also face a change in IT systems which will cost upwards of £2m. This cost will be replicated across the various private banks in the UK. Hence, the overall unintended consequence of RDR will be to drive global private banking business from the UK to other more flexible jurisdictions.
As a potential solution, an exemption from the adviser charging elements of RDR should be applied in relation to HNW clients as those clients are able to understand more complex products and charging structures. These clients should be given the freedom to elect to stand outside the new regulations.
The RDR is designed to protect UK consumers. The HNW client base that we service wants a full range of products and therefore should be permitted to opt out of the RDR protections in order have these available to them. We have attached a letter from Freshfields to the FSA on this point. We note that the FSA responded with the view that firms could "Opt Up" such clients to "Professional" status, thus eliminating the need to apply the RDR standards. However, this is not always possible, as the MiFID standards require a number of quantitative tests to be passed that do not necessarily apply even to extremely wealthy clients, for example, the requirement to transact more than 10 trades in a specific product per quarter, which is extremely rare in the case of Private Equity and Hedge Funds. The FSA is free, if it chooses, to apply a different standard, as RDR does not derive from EU regulation.
We would welcome the opportunity to discuss with the Treasury Select Committee solutions that would assist the UK in retaining private banking business which brings benefits in terms of revenue generation and employment and is one of the reasons why HNW clients choose to base themselves financially in the UK, which in itself, brings ancillary benefits to the wider UK economy.
January 2011
|
