The Financial Services Act (FinSA) and the Financial Institutions Act (FinIA) are expected to come into force at the beginning of 2020. These regulations are highly relevant to intermediaries, because FinIA requires them to be authorised and to adhere to the rules stipulated under FinSA when providing their clients with services such as investment advice or portfolio management.
Although this might sound very straightforward, the devil is, as always, in the detail. It is anticipated that strong initial and ongoing efforts will be required in order to analyse which areas will be impacted by these laws. In a second phase, it will be necessary to develop and provide a solution which is efficient, compliant, and does not hinder intermediaries in their daily business. The first two phases are designed to ensure that in a third phase, the system for the day-to-day business is up and running – ideally, this system would be automated and therefore simplify intermediaries’ daily processes.
Compared to EU regulations (such as MiFID II, PRIIP, CRR, and others), the degree of complexity of these laws is expected to be much lower. However, a number of strategic decisions must be taken during the implementation process with regard to the resources required to set up and maintain a compliant and efficient working environment.
Which questions should you be asking yourself?
One of the questions that must be answered is how retrocessions should be treated – if such fees account for a substantial part of an intermediary’s income, it is advisable that this business model be reconsidered. This is because, while FinSA allows for retrocessions to be received and retained, the regulation requires financial intermediaries to (a) calculate and disclose to the client the money that is retained before the service is concluded, and (b) obtain the explicit consent of the client. It is therefore unlikely that this model will be viable in the future.
Another very important question concerns the choice of a target operating business model that can efficiently handle the additional obligations arising from the new regulatory framework. The options available to intermediaries are:
- An in-house solution
- The analyses, development and maintenance of the FinSA framework are conducted in-house without the support of a third party (other than, perhaps, experts for specific questions, or case-by-case outsourcing).
- This is likely the most attractive solution for larger intermediaries with a broad client base and deeply embedded individual processes driven by a very specific business set-up (private equity, sustainability, etc.).
- It is also assumed that large intermediaries in particular can build on the at least partially implemented MiFID II solutions.
- A conglomerate/merger
- The assessment and definition of business requirements, as well as day-to-day business activities are combined within a conglomerate of several very homogeneous intermediaries. This model is likely to increase synergies and therefore pay off in the medium to long term.
- One prerequisite for such a model is that many synergies can be identified and a healthy balance between those processes that are purely regulation-driven and those processes that are unique selling points, are defined.
- A platform solution
- The most efficient solution for small and medium-sized intermediaries in particular is a platform solution. Independent platform providers, but also custodians, provide standardised service offerings which ensure regulatory compliance or at least strongly support the provision of regulation-compliant services.
- Theses solutions are very interesting and forward-looking because the strategic opportunity to outsource is becoming and will continue to become increasingly important in the future due to the rising complexity and number of rules to which financial intermediates must adhere.
- This solution has the best cost-added value ratio if a high level of individualisation is not required.
Think about how to establish a compliant framework
All market participants – especially intermediaries that will be required to comply with the new FinSA standards – will have to make a strategic decision in terms of how they want to position themselves for the future to avoid unforeseen costs and in a worst-case scenario, regulatory non-compliance. Regulatory non-compliance is no longer an option – the question is how to efficiently establish a compliant framework which fits with a financial intermediary’s business model.
About the author
Michael Taschner is Head Strategic Legal Regulatory at PwC