Sophisticated investors are feeling the brunt of a raft of new regulations introduced in the wake of the global financial crisis that eroded confidence in the financial services sector. By Johan van Zyl and Irwin Spilka:
The impacts are numerous and multifaceted and are limiting investors’ and wealth managers’ ability to leverage risk to achieve related returns. As could be expected, the realignment of traditional financial powerhouses from New York to London to Zurich was marked by a rigorous legislative review, resulting in amendments that have reshaped the boundaries of global financial practices. While the closing of loopholes and tightening of oversight are welcomed, it has left sophisticated investors who own global portfolios with somewhat of a headache.
In the European Union alone, more than 40 new legislative measures have been introduced since 2008. These sweeping changes include rules on everything from hedge funds and private equity, deposit guarantee schemes and enhanced frameworks for securities markets to heightened supervision of financial institutions, reporting rules and improved investor information requirements.
Apart from the legislative remedies that now place a greater emphasis on transparency and protection of the individual investor, the nature of global co-operation and agreements means that far more stringent measures are seeping into even the local financial markets. While these measures are welcomed, they come at a cost to investors and their wealth managers who are mandated to manage portfolios in multiple jurisdictions. These costs are not only direct on-going fees that have risen in response to the soaring enhanced compliance costs, but also, and more painfully, in the ability to utilise instruments that offer acceptable returns. Wealth managers have always traded on their ability to access above-average returns from clear but manageable risks. That ability has now been eroded as the screws have been tightened – we argue to the detriment of the wealthy investor. Take for example the case of the United Kingdom’s Financial Conduct Authority. This body was established in 2012 in response to the financial services fallout that has clamped down on retail investors’ participation in unregulated collective investment schemes as from the beginning of 2014. While the threshold of what constitutes a retail investor has been clearly defined – annual income above £100 000 or assets valued at more than £250 000 – this eliminates a great number of South African investors with offshore accounts who are both wealthy and sophisticated individuals who were previously able to enjoy the returns offered by these collective investment schemes. This is but one example of the manner in which investors’ choices are being throttled by these new regulations.
Is it to the benefit of unsuspecting investors? Sure! Are these measures needed considering the fallout that followed the 2008 crisis? Absolutely! What this means for the sophisticated investor is that the management of an effective portfolio that takes advantage of different asset classes, especially in multiple territories, requires a greater diligence as well as compliance challenges that were not necessarily the case pre-2008. What this means for wealth managers is that this new landscape requires a far more nimble and informed approach to continue to deliver the best results without falling foul of the increasingly restrictive legislation. The upshot of this is that compliance has taken a front seat in decision-making, demanding new levels of transparency and customer care that require investors to undertake continuing due diligence of their wealth managers to ensure they are still getting value for money. The extent to which the impact of these restrictions is being felt in South Africa is also increasing. This is evident in stricter oversight in the form of the Financial Sector Regulation Bill and adoption of the Twin Peaks legislation that will see the South African Reserve Bank assume the role of the prudential regulator. The global tightening is most apparent in the Financial Services Board announcement in March this year that it had signed memoranda of understanding related to alternative funds with 25 EU jurisdictions.
There is no argument against the tightening of rules following the considerable harm caused to the wealth and welfare of millions of people globally. The financial services sector and investors have to embrace these changes. However, the one question that remains to be answered is whether and to what extent they will be able to prevent a recurrence of such damage in the future. For now, as markets and wealth managers adjust to the new reality, investors have to make serious decisions on how to preserve and grow their wealth in an environment where the cards are seemingly stacked against them.
Author: Johan van Zyl BEng and CFA is CEO at Stonehage South Africa and Irwin Spilka LLB and Chartered FCSI is Executive Director, Group Risk and Compliance at Stonehage Group