Will new regulation create a more profitable private banking industry?
While many banks see the increasing regulations in the Swiss wealth management industry as a constraint which slows down business, some wealth managers and private banks see the Swiss Federal Act on Financial Services (“FinSA” – read more here: French or German) differently: they consider it as an opportunity to redesign their offer, prepare their price structure for 2020 and remediate price realization inefficiencies.
After a legislative process of more than ten years since the financial crisis, the Swiss supervisory regulations on consumer protection will enter into force on 1 January 2020. These rules aim to create a regulation on par with EU regulations that takes account of Swiss specific conditions and provides investors with sufficient protection. In contrast to the European Union, the Swiss legislator is seeking to implement principle-based rules.
In this context, wealth managers are adapting their service offering to comply with new regulatory requirements while providing their clients with clearly defined services, from execution-only to advisory and discretionary portfolio management services. While FinSA creates a level playing field in the Swiss market, it can also be seen as a catalyzer for change and an opportunity to redefine service offering and adjust pricing accordingly to compensate (if not even overcome) increased compliance and regulatory costs.
With respect to Suitability and Appropriateness tests, one of the key differences of FinSA compared to MiFID is the distinction of transaction versus portfolio-based Investment Advisory services.
Source: EY Thought Leadership (April 2019) – Financial Services Act (FIDLEG) Impact on the value chain and strategic implications
This means, in addition to a more stringent delineation of Execution-Only, Investment Advisory and Discretionary Portfolio Management services, wealth managers are also introducing differentiated Investment Advisory services offers that may correspond to different services, investment universes and S&A tests hence differentiated costs for the wealth manager.
It will also be critical for many players in the market to be able to convert Execution-Only clients to at least a transaction-based advisory service offer, not only from a compliance perspective but also from a fee point of views.
What is the impact on prices?
Selecting the right price for the new – and existing – mandates and services is critical and has direct impact on the topline. Banks are either engaging or will engage in full pricing review, which allow them to:
- Be more transparent on prices
- Adjust their pricing according to similar moves from peers
- Maintain profitability to reflect increase regulation cost in prices
While simple pricing strategies can be selected for short term objectives, private banks and wealth managers should take into account the increasing volatility of clients, which is primarily driving by prices (see below):
To win in the pricing game, banks need to have a clear understanding and communication of the unique value proposition towards their clients, and they need to ensure they are well understood by their clients and prospects.
Another way of not losing the pricing battle is to implement as early as possible multi-variate pricing simulations that will anticipate the impact of new prices on the top line. Usually the impact depends also on maket conditions and client behavior. Therefore, it is important for the front and middle office to be active contributors of those pricing simulations.
Our experience shows that pricing design is an iterative process. If prices change bluntly, usually they only produce distortion of client fees, without any realistic top-line impact.
Improve realization is necessary to maintain margins
Discounts are a common practice in private banking and wealth management, where prices are often more tailored than the services. The complexity and level of customization of the discounts often lead to unpredicted fee evolution when the standard prices change. One of the key success factors for a successful pricing migration is an intelligent management of historical discounts.