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THE UK RETAIL DISTRIBUTION REVIEW: A REFORM TOO FAR?

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financial business

The Retail Distribution Review (RDR) was announced as long ago as June 2006 promising to rectify all the evils of the retail investment market. After a convoluted gestation period, the final proposals became law at the end of 2012. The UK regulator had steadfastly promoted the benefits of a total ban on commission payments, the adoption of adviser charging and the use of the term ‘restricted’ for any type of advice that could not meet a new definition of ‘independent’. Their call for greater professionalism in the sector met with universal acclaim.

financial business

financial business

 

The Financial Conducted Authority (FCA) has now released the results of its first thematic review TR13/5: ‘Supervising retail investment advice: how firms are implementing the RDR’. Although based on a small sample, the regulator is generally pleased with progress. However, unsurprisingly, adviser firms and consumers are having difficulty in coming to terms with the meaning of ‘restricted’. Although a major issue, the FCA has no pre-set wording and continues to require individual firms to decide how they will best describe a service which is not independent and why. Of the other concerns, it appears that some advisers are still not disclosing their charging structures clearly in writing and ideally in cash terms. Investors should know the likely final cost early in the advice process. The FCA raises the risk of business models involving contingent charging or ‘no sale, no fee’. There may be too much pressure to sell? It found some advisers are claiming advice charges on single premium products by instalments despite the ban on this practice. Many were failing to describe adequately their ongoing service and its cost. Some may say these are teething problems but the FCA is launching a much wider review with the threat of enforcement fines to encourage full compliance.

Roger Davies

Roger Davies

The FCA published research in August which indicated an unforeseen rise in the number of retail investment advisers to 32,690 from 31,132 in December. The FCA believes the increase is attributable to advisers re-entering the market. This number is still substantially down from the 35,073 estimated for mid-2012. The latest figures do not, of course, identify the market sector targeted nor guarantee the well-being of many adviser firms operating in a sluggish economy still coming to terms with a commission-free world and increased professional indemnity insurance (PII) premiums.

Somewhere along the way the need of non-High Net Worth investors for face-to-face investment advice has been ignored. Deloitte had flagged that under the RDR reforms up to 5.5 million adults could stop using FAs or be unable to access advice. To the surprise of no one but the regulator, all the high street banks have withdrawn the investment advisers from their branches. As forecast, full advice has become the province of the High Net Worth (HNW) who inevitably have a greater propensity to pay upfront fees and who more readily recognise the value of ‘advice’. Indeed, many adviser firms in this area of the market are little affected by the RDR.

Undoubtedly, financial capability remains in its infancy in the UK. The big danger is that faced with an upfront fee many will take no further action. The FCA is putting great faith in the Money Advisory Service for free online generic advice. Whilst earlier discussion papers dabbled with ‘primary advice’ for simplification purposes, the regulator had far from championed the cause. Ultimately, progress in this area is restrained by EU-inspired regulation (e.g. MiFID-1) demanding that in face-to-face investment advice the full rules governing suitability and appropriateness must always apply. Such a viewpoint recognises that those less sophisticated investors require the maximum protection. However, it remains disappointing that safeguards could not be built into any streamlined advice process as surely preferable to a non-advised sale? Basic advice remains available but only for the sale of stakeholder products and the new Sergeant regime for simplified products includes no investment products.

Most will conclude that the RDR can only boost the vast savings and protection gaps that already exist. The government must be praying that auto-enrolment does the trick with triggering pension savings although long term care is the monster waiting in the wings. Inevitably, some advisers may look for retail investments that are outside the scope of the RDR reforms to earn sales commission (e.g. gold) but the definition of a ‘retail investment product’ is sound.

It is interesting to note that whilst some Member States concur with the FCA, European legislators have not agreed to a total ban on commission with the MiFID-2 proposals. Regulators across the globe must also be mindful of the real prospect of double-charging as product charges will not automatically reduce to compensate for the introduction of advice fees. Indeed, empirical evidence suggests that contrary in response to more online sales. The Lloyds Banking Group recently announced that it saw orphan-investors, those who post-RDR have lost their IFA connection, as a major growth area for Scottish Widows with an online non-advised sales process.

On the plus side, the RDR reforms recognised the need for greater professionalism. Although consumer groups will say this is long overdue, a minimum QCF level 4 qualification for all advisers combined with a greater emphasis on ethical standards is a very good start. It may take a generation for the consumer to value ‘advice’ and to trust their investment adviser alongside their doctor or accountant but the goal is now clear.

The FCA will claim removing commission-bias is to the greater good but is it a price worth paying? They say that the jury is still out. However, the UK consumer is unwittingly being used as a test bed whilst also footing the bill. Unsurprisingly, the Treasury Select Committee will now spearhead a review commencing in April 2014 on the impact of the RDR. With much related EU regulation in the pipeline (eg PRIPS, MiFID-2, IMD-2) rectifying retail investment problems in the UK will be complicated. The regulator appears to have jumped the gun with the RDR and may yet rue its earlier decision not to delay implementation.

ROGER DAVIES, Principal Consultant, ea Consulting Group – www.eacg.co.uk

Investing

Humans vs Robots: Which Is Better for Managing Investments?

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Humans vs Robots: Which Is Better for Managing Investments? 1

By Anton Altement, CEO of Polybius and OSOM Finance,

In an era of technological advancement, innovation, and fear-mongering sci-fi programs, fears over a robot uprising and artificial intelligence coup are rife. While these two hyperbolic scenarios are likely a while off, trading bots used within financial dealing are starting to supersede their human researcher counterparts. On Wall Street, these infallible and emotionally-neutral trading automatons are gathering acclaim. And some propose that they’re going to change the face of finance forever.

Let’s face it, not many humans are cold-blooded and rational enough, which are essential qualities for long-term trading success. This means those few strong traders can ask for high fees for their services, which are often completely unpalatable for a small investor. Robo-advisors, on the other hand, do away with this hubris, epitomising financial inclusion and cost-efficiency. Moreover, they are much more scalable than a human trader, with the ability to trade multiple markets at once.

Major commercial banks are the first to see the potential in these robo researchers. In 2019, multinational investment bank Goldman Sachs announced its own robo-advisory service. While the launch is postponed until next year due to coronavirus-based disruption, the market for robo advisors is still booming, with trading bot usage has grown between 50% and 300% from December 2019 to January 2020.

Why? Because unlike human traders, robots aren’t restricted by the primal urges of the reptilian brain.

A Quantitative Solution to Irrationality

There are few triggers more powerful in electing an emotional response than money, power, and greed. Our internal struggle to satisfy any one of these desires can set us on a disastrous course for failure—particularly when it comes to trading. The fear of missing out, loss aversion, and even hubris present major obstacles for traders to overcome. And, historically, we have very little success in doing so.

There are a few techniques at a trader’s disposal when it comes to evaluating entry and exit points for a trade. For the most part, they can be categorised into two distinct approaches: qualitative and quantitative analysis.

A qualitative approach involves in-depth data analysis pertaining to subjective information, such as company management, earnings, and competitive advantage.

Quantitative analysis, meanwhile, examines the statistical attributes of an asset, including performance, liquidity, market cap, and volatility. For the data-driven cryptocurrency market, with its swathe of exchanges and bounty of information (total supply, transaction volumes, fees, and mining metrics, etc.), it’s the latter quantitative approach that is often favored.

This is reflected by the 2020 PwC–Elwood Crypto Hedge Fund Report, which details that nearly half of all crypto fund managers (48%) opt for a quantitative trading strategy. And there’s one clear reason as to why. A quantitative approach—in the main—aims to neutralise cognitive bias.

Still, try as they might, no human is capable of totally ignoring their primal instincts. And that can prove troublesome.

In a study into emotional reactivity on trading performance, researchers of the MIT Sloan School of Management found that excessive emotional responses can be extremely detrimental to trader returns, particularly during times of crisis and within high volatile markets.

But where humans fall down, the novel trading bot thrives.

The Rise of the Robo Advisor

Trading bots are much more nuanced than their all-encompassing moniker would suggest. These bots come in many different varieties. Two of the most common are the analyst and advisor bots. The latter advisors build portfolios based on the client’s risk profile. Robo analysts, meanwhile, probe data released in annual company records, as well as SEC filings, to provide buy and sell recommendations.

Despite their varying traits, both benefit from negating the cognitive biases inherent in human researchers, analysts, and traders.

As such, within volatile and high-pressure market conditions, trading bots have proven to surpass the performance of their human equivalents.

A 2019 study from Indiana University appraised over 76,000 research reports published over 15 years from various robo-analysts. Researchers found that the robo buy recommendations conferred 5% better returns than those of the human analysts.

But while bots may have the edge over humans, their results vary wildly when competing amongst themselves.

Between May 2019 and March 2020, researchers pitted 20 German B2C robo-advisors against each other, measuring their performance and calculating the differences. The variation among the bots was enormous. But most impressive of all was the bot that came in pole position. The top robo advisor managed to restrain losses to just -3.8%, beating the other bots by around 14 basis points. And decimating traditional hedge funds who were down approximately -10% across the board following March’s tumultuous marketwide crash.

As it turns out, the main difference between the top robo performer and the rest was its unique strategy. The robo advisor not only used quantitative analysis, but it leveraged the irrationality of the market to its advantage—measuring conventional risk metrics, such as loss aversion bias and recovery time, to ascertain illogical trades and position itself on the other side. In doing so, it was able to interpret the market better than both the determinedly quantitative-based bots and the human-operated hedge funds.

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Investors’ growing appetite for private markets means firms must improve their regulatory governance

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Investors’ growing appetite for private markets means firms must improve their regulatory governance 2

·       Both large and small firms are struggling to meet regulatory demands due to poor governance of deal distribution, inaccurate investor profiling and inadequate data and document management.

·       Many firms are still relying on traditional, paper-based records which are more difficult to audit than electronically-held data 

·       A significant number of firms offering clients access to private markets are struggling to comply with regulations because they “don’t know what they don’t know”.

·       Over five and 10 years, UK private equity and venture capital funds have outperformed the FTSE All-Share, FTSE 100, 250 and 350 indices according to BVCA data, which has driven increased interest in the sector1.

Firms that operate in private markets without effectively using technology risk causing ‘investor harm’ and significant reputational damage to their own company by struggling to comply with Financial Conduct Authority’s (FCA) regulations.

The problem exists for firms of all sizes – from enterprise institutions to boutique advisers – as the “blind spot2” in regulatory compliance is not being addressed, often because organisations operating in this sector are not sufficiently aware of the regulations they should be complying with.

Some of the most common challenges that firms face include implementing robust governance around deal distribution, accurately profiling investors, and overcoming antiquated document and data management systems which make it difficult to audit client files effectively.

According to research carried out for Delio’s report ‘Private markets in wealth management’, 65% of firms said the challenge of consistently achieving full regulatory compliance was the main obstacle to launching their private market proposition.

Yet, investor appetite for private markets has grown significantly over the last decade3 and looks set to continue thanks to consistent returns and greater interest in areas such as impact investing. With investment growth averaging 20.1% over five years and 14.2% over 10 years4, compared to 7.5% and 8.1% respectively in the FTSE All-Share, firms’ need to ensure regulatory compliance isn’t going away and firms need to address with urgency.

Gareth Lewis, Co-Founder and Chief Executive of private markets technology specialist Delio, said: “We have been working in this sector for more than five years, yet we are consistently shocked at how difficult some firms are finding it to meet their regulatory requirements.

“First and foremost, any firm operating in private markets without robust regulatory frameworks in place is failing their clients. That’s before you even consider the repercussions of non-compliance for the firm itself, which could result in fines and potentially compensation to investors that have been mis-sold.”

Earlier this year, the FCA highlighted alternative investments as a key area that it will be focusing its attention on in 2020/215, with unverified reports that firms are already being contacted by the regulator as part of an ongoing review. The FCA itself said that although the letter mentions potential further work being undertaken, it “can’t confirm what that work is unless we make it public”.

However, because private markets are a relatively complex regulatory area, many companies “don’t know what they don’t know”, said Mr Lewis.

He added: “Many of the processes involved in private markets, from deal distribution through to properly identifying suitable investors, can create regulatory pitfalls. Firms who fail to see the benefits that technology can offer in these areas are taking unnecessary risks with their own reputations and, worse, client investments. Digital tools remain under-utilised by firms, with only one in four institutions reporting that technology plays a core role in how they deliver unlisted investment opportunities to their clients6. Yet, digitisation of these processes could minimise such risks through the

automation of document sign-off, approval tracking, proper and auditable investor profiling and so on.

“If companies continue to provide private markets services to clients using traditional methods rather than technology to enhance their compliance, they will inevitably come unstuck. It’s time for any firm that is serious about offering unlisted investments to take control of their regulatory obligations for the benefit of their clients and their own reputation .”

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Covid heightens need for cybersecurity in digital world says hampleton partners’ m&a report

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Covid heightens need for cybersecurity in digital world says hampleton partners’ m&a report 3

While the world is focused on the health and economic threats posed by Covid, cyber criminals are capitalising on this crisis

Hampleton’s latest Cybersecurity M&A report highlights the importance of cybersecurity vendors as all industries seek protection from cyber-attacks, now that millions more people are working and learning from home using VPN networks and potentially suboptimal computer equipment and inadequate cybersecurity.

Henrik Jeberg, director, Hampleton Partners, said: “A spike in phishing attacks, Malspams and ransomware attacks has forced companies digitising their processes to double down on IT and cybersecurity improvements.

“As a result, the IT Security Services segment has seen a rise in M&A activity, as firms continue to outsource their IT and cybersecurity needs. We expect this trend to continue as businesses narrow in on some of their IT vulnerabilities in ways they may not have needed to until now.”

The international tech M&A dealmakers’ report shows that overall deal flow in the cybersecurity space has been relatively consistent since 2015, with a record spike of 242 disclosed deals in 2019.

Projected volume of 196 deals for 2020 suggests that the coronavirus pandemic has not drastically affected total deal volumes. Valuations in the sector have stayed strong, with EV/S multiples trading at around 5x – rather than around 3x seen in the wider enterprise software M&A market.

IT security sector M&A

As the largest subsector within the cybersecurity space with 46 per cent of global M&A activity, IT Security Services looks on track to achieve a total of 50 deals in the second half of 2020, up 25 per cent on the first half total.

Example deals include TA Associates’ portfolio company HelpSystems merger with GlobalSCAPE in a deal worth $178 million. The deal is set to augment HelpSystems’ data security business, which includes data loss prevention and data classification software. The combined company will focus on providing the most comprehensive collection of trusted security and automation solutions to customers worldwide.

Also, security integration firm Allied Universal’s two acquisitions in the past 12 months, acquiring Advent Communications Systems and Phoenix Systems & Service (PSSI) both for undisclosed amounts.

Advent is a low-voltage integrator of IP video, access control, structured cabling and audiovisual systems with revenues exceeding $42 million and 125 employees.

PSSI provides security systems integration to businesses and has revenues exceeding $16 million and is known as one of the premiere integrators for access control, digital video, optical turnstiles and intercom systems in the U.S.

Private equity in cybersecurity

PE firms have funnelled significant investment into cybersecurity – including via their portfolio companies – with a focus on larger, more established targets. The share of financial buyers came in at approximately 36 per cent so far this year, much higher than previous shares which oscillated between 3 per cent and 26 per cent since 2010. This is likely to continue as Covid has forced some strategic buyers to stall their M&A activity, while financial buyers are sitting on large amounts of potential investment and will continue to have access to cheap debt in the near future.

Largest disclosed deals in the past 12 months

The top three deals by deal value were:

  • Thoma Bravo LLC acquired Sophos for $3.8 billion

  • Symphony Technology Group/Ontario Teachers/Alpinvest Partners acquired RSA Security Inc. for $2.1 billion

  • Advent International/Crosspoint Capital Partners acquired ForeScout Technologies Inc.for $1.7 billion

Download the full Hampleton Partners’ Cybersecurity M&A Report here:

https://www.hampletonpartners.com/reports/cybersecurity-report/

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