Increasing Global Regs Mean Higher Compliance Costs for Family Offices
An increasing global regulatory burden is leading to higher compliance costs for some family offices.
The cost of wealth management has been steadily rising over the past few years, as governments demand more transparency and tighter controls on the financial services industry.
The wealth management industry faces a cost of £4.5 billion ($5.9 billion) in the U.K. alone, much of which can be attributed to complying with added regulations, according to the Wealth of Opportunities report published by the British Bankers’ Association and the Wealth Management Association.
Research from Campden Research and UBS, meanwhile, concluded that the cost of operating a family office is on the rise globally. Typical costs are trending towards 1% of assets under management over time, it found.
Regulatory costs are still relatively low for single-family offices but are on the rise for multi-family offices, according to the latest EY Family Office Guide. Investment managers reaching out to more than one family or attempting co-investment deals are faced with tighter regulations. From MiFID II to Basel III, the more moving parts in a family office the higher the need for professional management of compliance.
The regulatory burden is also intensified by data and transparency regulations, especially in Europe. MFOs in particular face regulations like the European Union’s Anti-Money Laundering Directive, now in its fifth version.
Compliance is particularly cumbersome if some of the investors associated with an MFO are categorized as politically exposed persons. Similarly, tighter know-your-customer rules have added to regulatory pressure. The chief executive of a politically exposed family office told the Financial Times that compliance procedures could sometimes take nearly a year to complete.
The rising costs of compliance have implications for the structure of family offices. As a result, management teams may need to invest in technology to streamline operations, diversify services to augment revenue, or increase assets under management by reaching out to more families to achieve economies of scale.