The financial services industry is facing unprecedented change: from deregulation to (re)regulation. Current evolution is being prompted by both natural changes in client behaviours, but primarily as a result of a raft of new legislation and regulation which is driving an overhaul of “business as usual”.
Usually coming with a snappy acronym to make the obfuscating title even more so, regulation is targeting transparency, integrity and stability. From MiFID II and capital adequacy through to GDPR and the Asset Management Market Study, all target areas of the industry which the FCA (or equivalent) believes are detrimental or misleading the intended beneficiary. For example, MiFID II and the unbundling of research commissions aims to drive down the cost and increase the transparency of asset management to pensioners and savers, whilst the Asset Management Market Study takes aim at those managers purporting to be active yet have had little variance from their underlying benchmark.
As well as better alignment and disclosure, we are seeing continued enhancement of capital adequacy, either in areas where requirements were low (such as pensions administration) or enhancements to pre-existing requirements. We recognise a significant difference in systemic risk, and potential risk for broader stakeholders, between those businesses leveraging their own balance sheet (banks, non-bank lenders) as opposed to those acting as fiduciaries (asset managers, wealth managers). We would expect the former to always have enhanced requirements vs the latter.
What does this mean for industry participants?
Economic models and the way business is carried out are changing dramatically. It means more investment, more innovation, likely a period of consolidation and, ultimately for some, contraction. As always is the case, there will be unintended consequences in some quarters. We hope to see that this evolution does not lead to reduced competition, but rather acts as a stimulus for those firms with good ideas and quality people. As a firm Singer Capital Markets stand ready to continue to support small/medium sized independent firms to forge their way offering innovative alternatives; benefiting from being smaller, more agile and closer to their clients.
From a MiFID II perspective we have ourselves invested heavily in people, systems and infrastructure and intend to gain market share – to give just one example we will be looking to increase the number of stocks in which we make markets considerably over the coming months. Turning to some of the companies we follow, we would highlight Harwood Wealth (HW LN) as an example of such a business taking advantage of this evolution to build a business into prevailing demand catalysed by regulatory change.
In our most recent commentary this month we upgraded our forecasts as the company guided to FY results ahead of market expectations – a result of both organic and acquisitive growth. Harwood Wealth now trades at a price well in excess of that prevailing at the time of our substantial initiation note in April 2016 and the IPO price of 81p reflecting impressive “over-delivery” during the last 18 months.
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