July 7, 2020

In the latest edition of our Facing Change series looking at the impact, challenges and opportunities of the COVID-19 crisis on industry, Steve Elliot, Managing Director of LexisNexis Risk Solutions UK & Ireland was joined by Katarina Cook, ACAMS® UK Chapter Chair; and Head of Financial Crime and MLRO at Brewin Dolphin, one of the UK’s leading investment management and financial planning firms.

Reflecting on the impacts of COVID-19 on the investment management and financial advice sector, Katarina acknowledges that wealth management has seen big changes, being one of a small niche of sectors that, until now has clung onto tradition and remained largely face to face and paper-based in how it operates, if you exclude the more recent arrival of fintech offerings. “People like to see their wealth manager and wealth managers like to see their clients, so it’s had a big impact and has really forced people to push themselves outside their comfort zone and adopt digital in a way they’d never have done in the past. We’re really seeing a new future,” explains Katarina.

One of the main challenges facing industry post-COVID-19 is how to expedite recovery. Many believe firms have a moral imperative to make it easier to do business post lockdown in order to encourage customers to transact and facilitate a speedy return to revenue-generating activity. But this has to balance with the imperative on financial crime compliance teams to reduce financial crime risks. Katarina believes this will be one of the biggest challenges going forward. “It’s really stressful at the moment for wealth managers. We’re very aware we need to accommodate clients and make sure they can get hold of investments, invest their funds and carry out transactions, but we rely very heavily on wet certificates: birth, marriage and death. How do we accommodate customers now they can’t bring them in?” It will be easy, she says to judge financial institutions in years to come on their actions during the crisis, once we have all of the data, but right now, all financial institutions are in a very difficult position.

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Many might expect wealth managers to fear market instability above all else, but Katarina sees the wholesale change brought about by the crisis – and particularly what it does to people – as the biggest risk the sector faces today. “At Brewin, we believe fraud is the biggest financial crime threat. We’ve seen market abuse alerts increase – as have most of our colleagues.” As well as creating a “great landscape for fraud,” Katarina explains that the challenge is made even greater by the fact that it’s not quite fraud as FIs know it; “fraud risks haven’t changed, fraudsters haven’t changed, fraud types haven’t changed, but typologies have changed, and quickly. It’s a time of great stress [for compliance teams], at home with kids on their lap, trying to maintain controls. That’s when we’re vulnerable.”

In a more challenging operating environment, there’s always a danger of fraud and financial crime prevention processes being sacrificed and with one of wealth management’s main mitigating controls – face to face verification – now unavailable, how are firms coping? Katarina says firms are being forced to review their criteria; “it’s an appetite thing. Like it or not, we have to increase risk appetite.”

So, is the lack of face to face relationships in a sector that relied so heavily on them increasing pressures for firms to adopt more digital solutions? For Katrina it’s a resounding “Yes.”

“We’re all looking into it and it’s been interesting, both for us and clients because there’s been a joint realisation that we can do this. We can meet online, we have tools to save and share authenticated documents.” Change, albeit forced, is clearly refreshing for a sector with such a traditional image, but will the impact be long term? “[the crisis] made us go out and look for these tools, but why would we [now] get rid of good ones? We in ‘second line’ are actually quite excited now when we talk about what we can do with this, or that tool. We’re seriously looking.”

What is more, Katarina believes that the adoption of such identity authentication tools will provide benefits to wealth management firms across the business, not just the compliance department. “It’s really important that we stop thinking of financial crime as a separate function, a separate check, because the only way to really detect financial crime is to look at behaviour and understand client patterns. Understanding that is beneficial for many reasons – not just to prevent financial crime – but it helps with other things like understanding your client base and what they need.”

How does the move towards digitalised services sit with the wealth management sector’s traditional older demographic client base? While Katarina admits that the older generation is not there yet, there’s a younger generation who want to start investing and check their balance on their phone and don’t want to wait for their quarterly meeting with their investment manager. “Things are changing and all wealth managers are changing with the demand.”

So what can the wealth management sector learn from this crisis? “One of the main take-aways is we can do this – it works!” she explains, referring to the remote servicing of clients.  “It may have come about too quickly and not for the right reasons, but we’ve learned we have to be able to do things remotely.” For wealth managers, according to Katarina, that means helping clients communicate remotely and helping push them into their comfort zone.

One final and vitally important take-away for Katarina is this. “Although the situation has changed, and the whole world as changed, regulatory expectations have not! We’re still as equally responsible, if not more, to make sure our controls are working.”

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