“What is keeping you busy in 2018?” When I put that question earlier this year to a group of my colleagues, all of them multi-family office (MFO) specialists from London and the Channel Islands, I got a rather different answer than I expected. Of course, the family office end of the private wealth market has not been immune from the concerns of other members of the Society of Trust and Estate Practitioners (STEP) in this part of the world: the UK tax changes; client confidentiality in the age of CRS; the arrival of GDPR, and so on. And yet we forget that at the quasi-institutional end of the market which MFOs inhabit there is also another set of challenges. Here, the regulatory after-shocks of the seismic financial crisis of 2008 are still being felt in a more direct way.
The origins of Europe’s Markets in Financial Instruments Directive predate the 2008 crisis but the regime has been significantly strengthened as a result of it. MiFID II came into force in January with the aim of improving the functioning and transparency of financial and investment markets and strengthening investor protection. MFOs have been at the sharp end of these changes because they tend to deal with large numbers of different financial intermediaries: asset managers, custodians, providers of reporting and analysis, FOREX and other specialists, and so on. This has magnified the impact of the new regime on MFOs not least because parts of the market appeared to underestimate the extent of the changes; preparation in some quarters was rather last minute. Although, we usually think of an MFO as more akin to an institutional client, the regulator tends to look through to the underlying 'retail' clients, demanding the appropriate protections.
As well as the MiFID roll-out, my MFO colleagues also wanted to talk about the effect of the Basel III regime. The improved regulation and supervision of banks has been absolutely at the heart of the response to the financial crisis (and strong, safe banks must be near the top of every STEP member’s wish-list for their clients.) And yet there has been an unhelpful complication in the way cash deposits are treated; a real challenge for many MFOs. A major aim of Basel III is to make sure banks can respond swiftly and assuredly to the kind of sustained pressures the world witnessed a decade ago. To do this they're required to retain sufficient high-quality liquid assets. The new definition of which assets qualify is narrower and tighter than before with the upshot that banks are more selective about their deposit-taking and MFOs have had to look at a range of other options for their clients’ cash. On the plus side interest rates, as we know, have slowly started to rise again; there is cautious optimism the options for dealing with cash - and the rate of return – will improve.
As well as all these regulatory headaches, the MFO world has also been doing a certain amount of navel gazing regarding its operating models. MFOs tend to be glossy front-office businesses with a focus on client relationship management and investment work. Behind this shop-front they often outsource the back-office to banks or other providers better equipped to handle those tasks. And, crucially, what is it that connects front and back? For these businesses the middle office tends to be, in essence, a technology platform which provides data processing, analytics, reporting, etc. which requires a great deal of investment. Again this is often outsourced and here we find not only familiar industry giants but also fintech startups competing with them. Hopefully it's not apparent to the outsider if, behind the elegant MFO shop-front, there's a complex web of platforms, systems and third-party outsourcing arrangements. The increased regulatory burden itself encourages outsourcing – freeing front-office staff to do what they do best – but as a consequence there's now a serious pressure to make sure all the moving parts work smoothly together.
So spare a thought for our colleagues in the MFO world, traversing parallel universes of regulation in their hybrid space between private and institutional clients.