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Why small offices are currently best at clearing compliance hurdles

By Angel Lai Yan Young is the CEO of Harmony Advisors Limited and the former Managing Director of Goldman Sachs Asia LLC

‘There are two things inevitable in life,’ goes the old adage; ‘death and taxes’. For the modern financial professional one might add: ‘and compliance’. And, like both death and taxes, compliance isn’t just inevitable but global – jurisdictions are interlinked, policies are paired and the law, rightly, has a case to scrutinise financial dealings wherever they may be. This was a point well made just last week when Swiss giant UBS was hit by $59 million worth of fines in Hong Kong and Singapore for overcharging clients through a ten year period.

Angel Lai Yan Young
Angel Lai Yan Young

Hong Kong’s Securities and Future Commission (SFC) referred to ‘systematically overcharging,’ and said ‘UBS’s misconduct involved deception and a pervasive abuse of trust resulting in significant additional revenue for UBS to which it was not entitled.’ No one will be more perturbed by this than the bank’s own management. You don’t become one of the biggest and oldest banks in the world without championing client trust and they will be seeking to rebuild that swiftly.

However, the fact remains that this is by no means an isolated case. Two years ago Boston Consulting Group estimated compliance fines had cost banks $321 billion globally since the financial crash; it is likely now billions more. For a multitude of reasons, large financial institutions are trying but still failing to proof their operations against malpractice. In part, or in whole, this is because of the size of these organisations.

Large systems with multiple accounts will always struggle to update as fast as smaller, more nimble, setups that are already built on fully digital integrated networks. However, as the SFC made clear, the real damage at UBS was done not by antiquated systems but a systematic abuse by individual employees. I do not want to dwell on how and why this was able to happen but I do want to suggest that smaller, newer players in the financial world can win back some of the public trust that has been lost.

Here’s how:

Firstly, smaller firms are able to offer a more bespoke service in a wealth management industry becoming synonymous with the ‘advice gap’. This means if you’ve got a question over the tax exposure of your portfolio, or if you’re worried about how a policy change might impact your offshore holdings, you’ll be able to speak directly with the one person who is across all your dealing if you’re working with a small team, as opposed to going through the clunking machinations and siloed departments of a huge multinational.

This is one of the reasons I believe we will see a welcome return to the family office model. In recent years, as post recession costs, tight margins and compliance have led to service assimilation at large financial organisations, family office style finance has felt increasingly elusive – something really only for the very, very wealthy who already have such private setups in place. However, the idea of a one-stop-shop for all a family’s needs: from tax efficiency, to property advice to next generation planning, has once again become viable as the private client sector has realised it can tie up and present a united front of services for those with complex needs. For a relationship manager at an international banking marque and the family office adviser at a bespoke boutique, that presents an opportunity. So, family office services have come back into fashion but I believe it will be the smaller players who are best placed to deliver a true family office service.

The issues around compliance illustrate this point perfectly: you need to be able to react quickly and calmly to a compliance change. You need to have the information to hand and you need to be able to reassure, discuss and explain with the regulator and client as needed. If you are dealing with the combined wealth of just half a dozen families, or even just one, then that is second nature. Within a multinational financial setup a relationship manager is going to have to speak with tax departments, brokers, advisers, fund managers and lawyers across multiple offices. In a small advisory you can speak to the client, identify the most prudent route and act accordingly.

Another illustration of the importance of compliance process is in countering the cyber threat.

I don’t just mean having all the necessary digital security, firewalls and encoding in place – although that is obviously imperative. It’s also crucial to have met all the regulations around this, so that if you are hacked you don’t fall victim to a hefty fine as well.

There’s a cross over here with the advent of regtech. While watching out for nefarious cyber attacks, you also need to make sure the money you’re managing isn’t being laundered or manipulated elsewhere. Again, bringing in an agile digital setup will be in the DNA of a bespoke service office. By contrast, there’s a reason big banks continue to be the victims of data breaches, denials of service and ransomware.

This is all part of a bigger picture that has seen the pendulum of innovation within our sector swing from large firms and consolidation, back to small, new offices that are looking to make up perceived shortfalls of service. That all makes for a more dynamic marketplace – one in which we can retain and build trust and one in which the client should be the ultimate winner. That is timely as more and more people, especially in Asia, enter the High Networth bracket – and we aim to keep them there.

Regardless of the size of your firm the services you provide are going to be multifaceted and complex and that’s why compliance is so important. You aren’t just looking to prove you’re within the law, you’re looking to prove you’re a strong, safe and dextrous pair of hands.

It’s always worth having compliance at front of mind because it is the ultimate test case for your service. If a client needs to exit several large positions in multiple markets following a law change do you have the capacity to do that swiftly and without collateral loss? Are you able to really justify your one-stop-shop tag? Sometimes, a call from the regulator will give you the best answer.