General Data Protection Regulation is a ‘game changer’ for the financial services industry and many small firms are unlikely to be fully compliant with the new rules.

Nigel Green, the founder and chief executive of deVere, is speaking out since the implementation of GDPR, a regulation in EU law on data protection and privacy for all individuals within the European Union and the European Economic Area.

Mr Green says: “GDPR is a game changer for the financial services industry – the biggest shake-up I can remember.

“Not only is it protecting clients further by putting them back in control of their personal data, but it is going to make the industry work smarter, harder and better.”

He continues: “One of the main day-to-day ways GDPR will impact financial services is that no longer will firms be able to poach staff asking them to bring client data with them. Unfortunately, this has been a highly unethical modus operandi for many smaller financial companies for far too long. This is now no longer possible.

“Another key way that GDPR will affect the admin operations of financial services companies is the storage and management of the data. Holding data without good reason to do so will no longer be allowed.”

Mr Green goes on to add: “Despite them having ample advance notice, due to the breadth and scope of GDPR, and because it represents a fundamental shift for some companies’ business models, many smaller firms will find it extremely challenging to meet the requirements.

“It is likely that they will have found, and will continue to find, it difficult to dedicate the time and resources to getting this right and being fully compliant – especially as many are still struggling with the costs and demands of Mifid II and other complex regulatory reforms.

“As such, we can expect that many smaller firms will be hit with hefty fines for failing to meet GDPR’s stringent standards.

“Bearing this in mind, GDPR will prove to be a ‘burden’ too heavy for some smaller companies, forcing them to exit the industry.”

The deVere CEO concludes: “GDPR represents a watershed moment for the financial services sector. This is an opportunity for all firms to redouble their efforts to overhaul their business practices where necessary, ensuring the clients’ interests are always front and centre.”

(Source: deVere Group)

New research released from financial services technology leader FIS (NYSE: FIS) found that financial institutions with the most advanced operating models are growing nearly twice as fast as the rest of the industry.

The FIS research also found that financial services executives around the world are more confident in their underlying technology and operating models in 2018. Nearly half (47%) of firms surveyed said their operations function is strong enough to support their growth plans this year, compared with 28% in 2017.

The findings are part of the annual FIS Readiness Report, which surveyed more than 1,500 C-level and senior executives across buy-side, sell-side and insurance firms. The study asked executives of those firms to assess their organization’s capabilities across six key operational pillars. Based on their scores, FIS then further analysed those organizations ranking in the top 20% of the FIS Readiness scoring system. Classified as ‘Readiness Leaders,’ the top 20% were studied to see how their investment priorities differ from their peers and how that impacts their growth.

Readiness Leaders Outperform Peers

The research found that of the six operational pillars, firms’ digital innovation strategies have the most discernible link with stronger revenue growth, followed by automation and emerging technology. However digital innovation strategy ranked just 5.5 out of 10 on FIS’ index for performance, which highlights the weakest performance scores across the industry today.

Among the findings of the FIS 2018 ‘Pursuit for Growth’ report:

• Readiness Leaders achieved average revenue growth of 3.88% over the past 12 months, compared with 2.12% growth for the rest of the industry.
• 80% of Readiness Leaders have fully or near fully automated key processes, versus 46% of the rest of the industry.
• Nearly two-fifths of all respondents (38 percent) say they want to significantly reduce the size of their owned IT infrastructure over the next 12 months.

Martin Boyd, Head of Institutional & Wholesale at FIS, said: “Our research shows that financial services firms can increase their abilities to accelerate their growth if they evolve their traditional operating model of data management, efficiency and risk management into one built on digital innovation, emerging technologies and advanced automation. Based upon our research, those firms that have been able to expand their focus and modernize their operating model should be well placed for success in the future.”

(Source: FIS)

Outsourcing agreements worth £718 million were signed between January and March, according to the Arvato UK Outsourcing Index.

Outsourcing contracts worth £718 million were signed in the UK between January and March this year, with financial services and retail businesses the most active buyers, according to the Arvato UK Outsourcing Index.

The research, compiled by business outsourcing partner Arvato and industry analyst NelsonHall, found that deals worth £363 million were signed in the financial services sector, accounting for 51% of the total UK outsourcing market in Q1 and more than double the value agreed in the previous quarter (£153 million).

Retail companies agreed outsourcing deals worth £140 million in the first quarter of this year after three months of no activity in October to December 2017, according to the findings.

The rise in spending across retail and financial services contributed to an eight% increase in total contract value compared with the last quarter of 2017.

Customer service agreements continued to factor highly in UK outsourcing activity, accounting for over 20% of all spend (£152 million). This, combined with HR and payment processing contracts, saw Business Process Outsourcing (BPO) deals account for £256 million of spend – up from £179 million agreed in Q4 2017.

IT Outsourcing (ITO) contracts worth £462 million were signed in Q1, with procurement focused on cloud computing, and asset and infrastructure management.

Despite the rise in activity quarter-on-quarter, the value of outsourcing contracts signed in Q1 represents a more subdued start to the year compared with 2017 which was a record year for the industry. The research found that spend on outsourcing deals between January and March has fallen 75% year-on-year from Q1 2017.

Debra Maxwell, CEO, CRM Solutions UK & Ireland, Arvato, said: “Following a strong year for UK outsourcing in 2017, we’ve seen a more subdued market in the first quarter. With Brexit uncertainty continuing to influence buying decisions and the imminent implementation of GDPR taking up internal resources, it is to be expected that fewer deals would make it over the line in this period.

“Yet, our findings show there remains strong appetite from businesses to work with outsourcing partners to bring in external expertise for key operational areas such as customer services, and to invest in maintaining a robust IT infrastructure.”

The private sector dominated the UK outsourcing market in Q1 as businesses accounted for 90% (£645 million) of the total value of contracts signed, according to the findings.

The research found that public sector organisations agreed deals worth £73 million over the period, down from £229 million in the previous quarter. Government departments focused on securing contracts for cloud computing and application and infrastructure management.

The Arvato UK Outsourcing Index is compiled by leading BPO and IT outsourcing research and analysis firm NelsonHall, in partnership with Arvato UK. The research is based on an analysis of outsourcing contracts procured in the UK market between January and March 2018.

(Source: Arvato UK & Ireland)

Rising fears of cybercrime are prompting financial services firms to increase their spend on security, according to new research from Lloyds Bank Commercial Banking, which canvassed the views of the world’s largest financial institutions.

The research found that six out of seven (85%) financial services firms have spent more on tackling cyber risks in the past 12 months, with one in seven (14%) having significantly increased their spend.

Over the same period, almost nine in 10 (87%) have become more concerned about cyber-risks, with nearly a quarter (23%) becoming significantly more concerned.

Priorities and risks

When asked about what they wanted to achieve from their technology investment in the coming year, one in seven (14%) financial firms cited improved cyber-security as their top priority. It was the third highest priority area flagged behind reducing operating costs (17%) and revenue growth (26%).

The picture was similar when firms were asked about risks to their UK operations for 2018. Respondents said cyber security was one of the most significant risks, alongside increased market competition and geopolitical uncertainty, but behind macro factors such as the effects of Brexit and economic uncertainty.

Robina Barker Bennett, Managing Director, Head of Financial Institutions, Lloyds Bank Commercial Banking, said: “The pace of technological advancement continues to offer tremendous opportunities to financial institutions, but this has been mirrored by the rising threat of attacks from increasingly sophisticated cyber criminals. As a Group, we work closely with businesses across the UK to help build their digital skills, so it’s encouraging to see the UK’s financial sector is alive to the issue and responding with increased investment.”

Preparing for the worst

Despite firms prioritising investment in new technology to safeguard against cybercrime for the year ahead, one in 10 (10%) are still not insured against a cyber-attack.

A similar number (nine%) said they have taken no steps to arrange contingency funding, and seven% have made no contingency arrangements with banking providers, such as to guarantee payments, for example.

However, almost all (95%) firms questioned did say they were confident their finance and treasury functions were suitably prepared to recover from an attack, with one in five (20%) saying they were very confident.

Robina Barker Bennett added: “While reassuring overall, there are still a small minority of organisations that aren’t mitigating risk with insurance or contingency measures.

“The financial and reputational impact of a successful cyber-attack is becoming more severe. Investment in proactive, preventative cyber security measures should go hand-in-hand with robust planning for the worst-case scenario.”

(Source: Lloyds Bank Commercial Banking)

Fraud is an intricate practice. The methods of criminals creative and meticulous, and the cost to companies and consumers staggering. In the UK, the fraud economy is thriving. It’s a growth industry. And it’s showing no signs of slowing down.

Last year, the Annual Fraud Indicator report revealed the total cost of losses to the UK economy to be a colossal £190 billion. To put that huge number into context: it represents more than the government’s combined spend on health and defence.

The best way to describe the current fraud problem: pervasive. A recent survey by professional services firm PricewaterhouseCoopers (PwC) highlighted that half of UK companies had fallen victim to fraud or economic crime in the past two years. Today, businesses are finding themselves fighting a surge of sophisticated attacks.

At the centre of fraud is technology. As technology advances, new forms of fraud emerge, and more robust security solutions are developed. It’s a double-edged sword. But businesses need to be aware of trends and predictions that will allow them to offer the best possible protection to their customers.

In the financial services sector, the struggle has been striking a balance between innovation and protection. So far, it’s something that many in the sector have failed to get right. A large part of this is due to increasing market and consumer pressures. In an age of hyper-globalisation, with industries undergoing rapid digital transformation, financial institutions are facing demands to increase the pace of delivery and provide an omnichannel experience.

Due to the rise of digital commerce and the proliferation of multiple-channels and payment types, there are more data transactions taking place than ever before. While this is a big benefit to businesses, it brings with it greater risk. An omnichannel environment creates a number of challenges when it comes to fraud management. The sheer number of avenues exposed at any one time can stretch security thin. For fraudsters, this makes it ripe for exploitation.

Yet, many institutions still rely upon disparate services and products that act in isolation of one another. This piecemeal approach is a hindrance. It makes it much more difficult to recognise certain types of fraud and leads to delays in decision-making.

The truth is that most legacy security systems and anti-fraud measures simply aren’t able to keep up with modern fraud attacks. They’re too wide in scope, complex in execution and high in velocity. So, the sector is now turning to technology in a bid to strengthen its efforts to fight fraud.

Automation has been the most widely adopted, so far. It’s able to reduce the burden on finance professionals, particularly when it comes to back-office processes, such as transaction and application processing, and audit compliance. It’s also a viable solution for assessing risk and limiting exposure to fraud. As a result, institutions are introducing everything from machine-learning platforms to robotic process automation (RPA), network analysis and artificial intelligence (AI).

The common theme among automation technologies is that they use algorithms to spot suspicious activity, detect patterns and predict outcomes in large data pools. Some of the more advanced platforms are even capable of assessing the anatomy of a fraudulent transaction. These solutions can draw inferences based on the information available, raise questions where the data is incomplete and produce audit trails (vital in such a heavily regulated industry).

But while we’ve seen a greater uptake of automation technology within financial services, questions remain. The sector has a history of being risk-adverse and sceptical of new technologies. And industry experts have queried whether institutions are using technology on the same scale to prevent fraud as fraudsters are to perpetrate it.

One of the biggest concerns to businesses, especially banks, has been the up-front cost of investing in these technologies – as well as how fast they can be implemented and how well they integrate with the existing infrastructure.

It’s fair to say that it’s a large-scale change for such a traditional industry. But to hesitate to modernise anti-fraud measures – and to defer investment in technology that’s designed to combat this problem – based on whether or not it complements the current system is short-sighted. When it comes to fighting fraud, the financial services sector must analyse the impact of technology trends and invest accordingly.

The default position from those within the sector should be: Sooner or later, we will succumb to a fraud attack. And businesses need solutions that are intelligent, efficient and provide actionable insights.

Fighting fraud across the omnichannel is a difficult task. In the digital era, automation technology is vital. If the financial services sector is to lessen its exposure to fraudulent practices, and provide greater protection to its customers, then it must think strategically. At present, the sector finds itself locked in a technological arms race with fraudsters. Institutions need fast-acting, agile solutions – not quick fixes or outdated legacy security systems. It needs to invest in, and place its trust in, technology.

By increasing its reliance on automation, the sector will be better positioned to keep pace with and protect against the frenetic nature of modern fraud attacks.

Robert Hoff founded Mountain State Financial Group in March 2015 after 15 years of experience in banking, investment, and finance. It was during this time that he saw the many opportunities for improvement in the finance industry, particularly for home mortgages. Thus, he decided to tackle these issues head on by starting his own mortgage company to help clients directly.

Mountain State Financial Group is a mortgage brokerage firm built around the idea mortgages can be done better. As the president of MSFG, Robert likes to stay close to the clients and their mortgage advisers to ensure that the company is able to act quickly to changing circumstances and opportunities. His team is comprised of highly competent and experienced individuals who share Robert’s belief in raising the bar in the mortgage industry. Below, he tells us more about his company, the motivation that drives him and mortgage trends in Colorado.

Have there been any interesting recent trends regarding mortgages in the state of Colorado?

Home prices continue to outpace wage growth and have for a number of years. Unfortunately, this is inhibiting many from pursuing a new home – especially first-time homebuyers with limited inventory on lower-end homes, which leads to bidding over asking price. This often puts first-time homebuyers on the sidelines, even though they may qualify to purchase a home. This stalls home ownership for many, especially in a market where both home values and interest rates are trending higher. In some situations, these individuals wait too long until home prices and interest rates are too high to qualify for a mortgage.

In addition to inhibiting potential first time homebuyers from purchasing, rising home prices are also pushing many clients into High Balance and Jumbo mortgage programs, which are often more expensive and restrictive than loans below the conforming loan limit. This is also keeping existing home owners in their current homes instead of selling and buying new homes, which is tending to lock up inventory even further.

What are the most common mortgage solutions that Mountain State Financial Group helps clients with?

One of the greatest ways that Mountain State Financial Group adds value to clients is by simply being financial experts. That generally involves asking more questions and gaining a better understanding of what the clients want and need. Situations are always changing, so the mortgage solutions we provide do as well. For our clients, the most important thing is that we have the know-how and product availability to meet and exceed their needs and expectations.

One piece of advice I would offer to homebuyers looking for the right mortgage broker is to search for a lender who has seasoned professionals and a deep bullpen of investors. Too many mortgage companies out there call themselves brokers, but they just push all their business to one or two investors. This doesn’t provide great value to the home buyer. MSFG has strategic partnerships with various investors specialising in specific areas - whether it be pricing, underwriting, or loan criteria.

What are some of the issues that your clients face before applying for a mortgage? How do you help them overcome them?

Unfortunately, the market is flooded with mortgage originators who are under qualified and inexperienced, which puts potential borrowers at risk. This makes it crucial to understand how to find a professional firm. At Mountain State Financial Group, we start by simply educating potential borrowers about mortgages. Once armed with new knowledge, we encourage borrowers to compare programmes, and price. Sorting the wheat from the chafe can be cumbersome for borrowers, so we feel it is our duty to assist these potential clients in understanding and choosing a mortgage broker, even if it ultimately means not becoming one of our clients.

Other issues that plague borrowers before applying for a mortgage include understanding the effects of different down payment amounts, credit concerns, and what they can use as qualifying income. MSFG assists with down payment options, credit repair contacts, and, perhaps most importantly, we understand the different types of income streams that can be used to qualify for a mortgage. Experience in the finance and mortgage industries simply can’t be stressed enough.

What motivates you about helping people with their mortgages?

Our founding principle motivates us daily. We aim to simply make the mortgage process better. The reaction we get from clients when expectations are exceeded is priceless. Great mortgage brokers take something incredibly complex and make it incredibly simple. We take pride in doing this right and strive to deliver what we say we’ll deliver 100% of the time.

Website: https://www.msfg.us/

Finance Monthly connected with Colin McDonough, Director of 50 Words LLC to hear about his company and the crisis communications challenges that they help their clients with.

Can you tell us a bit about the work that you do with your firm 50 Words? What are the clients that you work with and what’s your overall goal for the company?

We are a full-service marketing, public relations and crisis communications firm. Although we have customers across many industries, we focus on financial services and professional services firms. This includes bank-owned and independent financial services providers such as asset-based lenders and factors, investment banking firms, financial advisory and turnaround firms and other professional services firms such as accounting and legal service providers. Our clients vary from start-ups through to Fortune 500 companies.

Our goal is to act as an extension of our clients’ marketing and communications departments if they have them. If not, we step into that role as their dedicated team. So, our services vary greatly from client to client. For some, we guide them through strategic planning and for others, it’s all about execution of an existing plan. On any given day, the professionals in our firm could be hard at work designing or updating websites, developing and posting content for social media or digital marketing campaigns, crafting communications such as press releases or helping guide a client through a crisis communications situation such as a criminal matter, downsizing of a labour force or other unforeseen situation.

What are the typical crisis communications challenges that you assist with? What’s the best way of handling one?  

Some examples of crisis communications situations we have worked through with clients include criminal matters, bankruptcy and downsizing of a labour forces, labour issues including strike, closing of business unit, sale of business unit, failed merger/joint venture and failed product launch.

The practice of crisis communications management is much different today due to a 24/7 news cycle along with a plethora of individuals on social media platforms reporting news. Brand value can be destroyed in minutes when a crisis hits.

The best approach for any company is to have a tested crisis communications team and process in place before a crisis happens. But sadly, this is not the case for most firms, especially middle market or smaller businesses who don’t want to spend the time or money for this to happen.

Firms need to have a plan and process in place, identify members and roles, select and train key spokesperson(s), control access to all communication points including the website and social media platforms, and build a relationship with a PR expert so he/she is knowledgeable about your firm before a crisis happens. Firms don’t have 24 hours to react when a crisis hits, they have minutes. If I could give one piece of advice to management teams, it would be to invest in media monitoring software.

What differentiates 50 Words from its competitors?

Two things. Firstly, our focus on financial services firms and professional services firms, many in the turnaround and restructuring space. A common complaint in any organization about the agencies they deal with is that they don’t understand the nuances of their sector. Our principals have over 25 years’ experience in the sector, so there isn’t a learning curve when they hire our firm. We network in the same industries as our clients so we understand the industry and market dynamics they face. Secondly, we offer a complete solution for our clients. Companies today are juggling multiple agencies to meet all their marketing and PR needs. That doesn’t work for small and middle market businesses who don’t have supply chain or internal resources to manage multiple vendors. We are that single source that our clients need. If we don’t have what they need, which is rare, we bring in a partner to meet their needs.

Rapid technological change is changing the business landscape and businesses have to adapt or will be left behind. While this change impacts all business functions, marketing and communications are particularly affected. The capabilities and competencies required for marketing and PR professionals are evolving and firms often can’t afford to have large teams in house to meet their growing needs. They should build a network of go-to technological savvy marketing and PR professionals to supplement their existing staff.

Website: http://www.50words.com/

• 2,265 FDI projects secured in 2016-17, a rise of 2%.
• Total FDI jobs down by -7%, falling from 115,974 to 107,898 in 2016-17.
• Software and Computer Services is number one for FDI, with 418 projects 2016-17.
• The South East, West Midlands and North West hold the highest number of FDI projects.
• America remains the UK’s largest source of inward investment, providing 557 FDI projects.

It has been reported by GOV as per the report UK FDI Investment, Trends and Analysis: 2018 that growth in the value of Foreign Direct Investment (FDI) positions held in the UK by overseas investors (FDI liabilities) exceeded that of UK FDI positions held abroad (FDI assets) in 2016.

This resulted in the UK’s net FDI position falling from £50.8 billion in 2015 to £12.5 billion by 2016, the lowest net position since comparable records began in 1997.

Inspired, Turnerlittle.com took time to consider the projects and jobs created by FDI in the UK, identifying the 6 sectors benefiting from this type of investment the most.

Figures from the Inward Investment Results 2016-17 report released by the Department for International Trade, declare total FDI projects in the UK rose by 2% in 2016-17, from 2,213 (2015-16) to 2,265. This comprises projects by “existing investors” in the UK (1,212) and projects by “new to the UK” investors (1,053.)

Types of Foreign Direct Investment taking place include New Investments – up by 9%, Expansions – down by -5% and Mergers and Acquisitions (including Joint Ventures) – down by -6% in 2016-17. Further, the USA remains the UK’s largest source of inward investment; providing 557 projects, followed by the rest of Europe, Middle East and Africa (261) and China and Hong Kong – with 160.

However, the increase in total FDI projects is not mirrored in total jobs, with roles suffering a -7% fall from 115,974 (2015-16) to 107,898 in 2016-17. New roles decreasing from 82,650 (2015-16) to 75,226 in 2016-17.

In a table created by Turner Little, it is evident where projects are feeding a healthy workforce by comparing total projects and total new jobs in regions across the UK.

Turnerlittle.com found that excluding London, the South East (217), West Midlands (151) and the North West (147) hold the highest number of Foreign Direct Investment projects. This equates to 5,432 new jobs in the South East, 6,570 new jobs in the West Midlands and 6,501 new roles in the North West, 2016-17. Proving FDI to be a real asset in the UK.

In terms of industry, Turnerlittle.com found the UK’s Software and Computer Services sector to be number one for FDI, with 418 projects in 2016-17. This total is followed by the Financial Services industry (217) and Business and Consumer Services (211.)

Closing the top six sectors benefitting from Foreign Direct Investment the most are Environment, Infrastructure and Transportation, with 184 FDI projects in the UK, Creative Media (151) and Advanced Engineering and Supply Chain – with a total 146.

The top three sectors with the least FDI projects are Chemicals and Agriculture (50), Extraction Industries (49) and Aerospace (47.)

(Source: Turnerlittle)

Finance Monthly speaks to Pierre-Noël Formigé, the Founder and CEO of Swiss company SEQUOIA, about the wealth management and estate planning solutions that his company provides, as well as his tips on maintaining and growing wealth for future generations.

Can you tell us about the core services that SEQUOIA offers?

SEQUOIA offers a holistic approach of wealth management thanks to a genuine "open architecture" which includes: wealth management, establishment of funds, management of funds - advice and follow-up, estate planning (trusts, foundations, companies), services of family offices, life insurance, financing (real estate, aircrafts, boats), reports and record keeping, risk management, compliance and regulatory assistance.

What would you say are the particular benefits for individuals of having professional assistance in relation to managing their wealth?

There are numerous benefits for individuals that decide to trust SEQUOIA with their wealth management. Our aim is not only to offer financial services, but also a financial experience and networking. Each solution and experience that we offer are specifically and uniquely tailored. SEQUOIA’s modularity and extensive experience allow for easy adaptation to our clients’ expectations.

What strategies do you and your team at SEQUOIA implement to ensure that your clients’ goals and objectives are achieved?

At SEQUOIA, clients are in the centre of our decision-making processes - they are our key priority. We have developed a well-informed overview of each of our clients’ financial situation, as well as a better understanding of clients’ goals and limitations.

Every portfolio construction starts with a discussion with the client or its representative, in order to fully understand their objectives and deliver a tailored-made investment proposal, allowing to approach and negotiate with partners. Our team can, at the request of the manager, take on a direct role in the relationship with customers, in accordance with their objectives and needs.

In your experience, are individuals fully aware of their assets and worth so that they can take advantage of tax planning?  Which types of assets are usually missed?

SEQUOIA’s clients are fully aware of their assets, however, they might not be fully aware of their tax impact. We ensure that clients have better tax awareness, as it does have the potential to improve individuals’ returns. According to surveys, while many factors impact investors, the majority of high-net-worth investors say that it’s more important to minimize the impact of taxes when making investment decisions, thus we offer the right measures to help high-net-worth clients reduce the taxes owed on income and investment gains.

In order to do so, we put a lot of effort in selecting the right investment products. We try to take advantage of some losses, and implement additional strategies that can help our clients to manage, defer, and reduce taxes. However, sometimes, clients do not mention their real estate assets, which could have an effect on tax planning; we provide advisory services in relation to that too.

What solutions do you offer in respect of maintaining and growing wealth for future generations of the same family?

Transmitting heritage built from generation to generation and building a better future for entrepreneurs is the essence of SEQUOIA Group. Our team of professionals provides high-quality services in order to manage our clients’ wealth, taking future generations into account.

From portfolio management - with tailor-made investment solutions matching the clients’ needs, to liability management - which includes heritage planning, distribution agreements, trustee and real estate project management, SEQUOIA provides a cost-effective turnkey solution based on legally compliant practices to deal with the impact of new regulatory landscape and the different legal, technical and operational risks.

How challenging is it to work in an ever-changing regulatory environment?

It is obvious that the status quo cannot be maintained in this ever-changing regulatory environment, however, SEQUOIA’s approach regarding this is to constantly adapt and understand those changes to serve our clients better. Choices that have been made in the past may not be completely relevant in today’s environment or vice versa, but our job is to continuously develop strategies that are relevant to our clients.

Website:

http://www.sequoia-ge.com

Jayne Gibson is a professional financial planner, a pension transfer specialist and the Managing Director of Insight.Out Financial. Below, Jayne speaks to Finance Monthly about defined benefit schemes and the challenges they can come with them, as well as the one thing she would change about them if she could.

Tell us about Insight.Out Financial and your professional career?

We are a friendly and approachable company with a wealth of expertise in pension transfers, personal & corporate financial consultancy. We make our experience and knowledge very accessible to our clients with our empathetic approach, but most importantly - our charges are transparent, fair and reasonable.

I started the company in August 2015 with the aim of building a business that is customer-focused and provides exception standards of service and advice, with professional ethics at the core of our proposition. We are based in Belfast, Northern Ireland, however we have a UK-wide clientele, and regularly visit all regions in Britain.

I have been a Pension Transfer Specialist since 1998, and have extensive experience in advising on occupational pension schemes, including Defined Benefit, Defined Contribution, as well as more specialist pensions for small business owners.

I am one of the first Chartered Financial Planners in the UK and am also a Fellow of the Personal Finance Society since January 2006, as well as a Chartered Fellow of Chartered Institute of Securities and Investments since 2012. I have continued with my studies, being awarded a Masters in Financial Planning & Business Management in 2012. I am currently working towards a PhD, with a focus on building consumer confidence in the financial planning profession.

What attracted you to the defined benefit pension schemes field?

I have been advising on Pension Transfers for more than 20 years. When I first started, there were very few advisers qualified to advise on pension transfers and a lack of knowledge and understanding of the value of the benefits offered and the impact for members of occupational schemes. The main reason for this was the highly complex legislation in place at the time, which was different depending on when a member joined and left a scheme. Pension simplification in 2006 did bring the personal pension and occupational pension regimes in closer alignment, and over the next 10 years, successive legislative changes, culminating in the pension freedoms legislation in 2016 have meant that more and more people need advice.

The advice for many of my clients with defined benefit schemes is life-changing. It is the biggest financial decision they will ever have to make, and will have the biggest impact on their, and their family’s future lifestyle. Changing demographics mean that the traditional “one size fits all” approach for most defined benefit schemes is less and less relevant. More and more people are looking for a different solution and wanting to shape their own personal retirement.

How do defined benefit pension schemes work?

Defined benefit schemes, often referred to as ‘Gold Plated Pensions’ are offered by companies for the benefit of their employees. Traditional style schemes provide a fraction of a member’s salary at retirement for each year they have been in service. For example a 60^th scheme would provide 1/60^th of a member’s final salary, multiplied by the number of years they had worked for the business:

For example:

John has worked for his employer for 27 years and is due to retire at the age of 65 with a final salary of £26,000. His pension income is calculated as 27/60ths x £26,000 = £11,700. The pension of £11,700 is payable from John’s 65^th birthday and will increase in payment in line with inflation. It is guaranteed to be paid for the rest of John’s lifetime.

At retirement, most schemes will offer an option to take a cash free lump sum. This can be paid as a lump sum in addition to the pension, or by commutation where part of the income is given up in return for a lump sum. The maximum lump sum available is calculated using HRMC formula of (20 x pension) @ 25%, or another method set down in the scheme rules. If an alternative method is used it cannot exceed the HMRC maximum amount. A commutation rate is then applied to the lump sum to calculate the amount of pension that is given up in exchange for the lump sum required. The scheme actuary will set the commutation rate and this can vary greatly from scheme to scheme. Most public sector schemes use a standard 12:1 rate, however private sector schemes have more flexibility and may choose a rate which more closely reflects the cost of the pension given up.

For example:

John has an option to take a cash lump sum by giving up some of his pension. The maximum lump sum he can take is calculated at (£11,700 x 20) @ 25% = £58,500. If he wishes to take the full lump sum, he will have to give up a proportion of his pension. This is calculated using a commutation rate of 12:1. His reduced pension is calculated as follows, £58,500/12 = £4875, £11,700 - £4875 = £6,825 pa.

Many schemes will also provide death benefits for a surviving spouse or in some cases, other financial dependent. This will generally be in the form of a spouse or dependent’s pension, calculated as a percentage of the member’s pension. There are many variations to the formulas used by schemes to calculate these benefits and the eligibility criteria applied by each scheme when assessing a survivor’s entitlement to benefits, it is essential for members to fully understand these, especially where their circumstances are not straight forward. Some schemes will only pay death benefits to a legal spouse, where others have a more generous approach and will consider a life partner, where financial interdependency can be established. It is also important to understand that spouse benefits are not a contractual entitlement and are paid at the discretion of the trustees. Spouse benefits can be reduced and even stopped in some circumstances, e.g. where the spouse remarries or is even co-habiting.

For those in same sex marriages, and civil partnerships, it is especially important to understand the scheme’s eligibility criteria. Under current legislation, there is no compulsion on schemes to change their scheme rules to accommodate changes in legislation. Where rules have been amended, in some cases this will only date back to the date the relevant legislation came into force.

Most schemes will also guarantee to pay the member’s pension for a minimum period of time, generally 5 years but could be as much as 10 years. This in effect means that the member’s full pension will be payable for at least the period of the guarantee period. Any outstanding payments are paid as a lump sum and any spouse pension will commence in payment.

For example:

John retired at the age of 65 and unfortunately passed away after two years. His nominated beneficiaries will receive a lump sum of 3 x £6,825 = £20,475, plus John’s wife will start to receive a pension of £5,850 pa (50% of the unreduced pension), which is payable for her lifetime.

Most public sector schemes such as NHS, Teachers Pensions and many local government pension schemes, conform closely to this format, however since 2014, many have changed to a career average basis (CARE) to calculate benefits. Members earn a fraction of their earnings for each year which is increased in line with government published rate of inflation. These are accumulated each year to arrive at final pension entitlement. One of the biggest differences is that transfers are not available from unfunded schemes (e.g. NHS, Teachers schemes) unless going to another defined benefit scheme. Generally local government schemes do still allow transfers to a flexible pension plan.

Private sector schemes are much more varied and it is much more important to fully understand the benefits a member is entitled to. Each scheme will have their own individual combination of benefits covering the whole spectrum of how benefits are accumulated, how they increase in deferment for leavers and in payment from retirement, death benefits available, and entitlement to early or late retirement. Private sector schemes are also more susceptible to financial insecurity of the sponsoring employer.

What are the typical challenges that clients approach you with in relation to transferring their defined benefit pension?

Many clients are now much more aware of the options that are available from personal pensions with the introduction of pension freedom legislation. There is now much more coverage in the media, and availability of information via internet, informing consumers of the benefits of flexible benefits in retirement, and current high transfer values has prompted a huge increase in enquiries for advice.

The main areas of concern are:

1. Flexibility & control – Many more people have a different outlook on retirement rather than working to 65 and then stopping there. People would like to consider winding down or even the possibility of a career change from a stressful job to something more enjoyable. Pension freedoms offers many more options that may be more suitable, however these are not available through a defined benefit regime.
2. Availability and value of death benefits - Demographics have changed significantly in recent years and the traditional model, based on nucleus family, no longer works for many people. Families often have complex relationships where it may not be easy to identify financial dependency for one individual. Scheme rules vary significantly and the availability of spouse pension, or dependent’s pension is generally at the trustee’s discretion rather than an automatic right. This is specifically relevant for anyone in same-sex marriage or civil partnership as schemes do not have an obligation to change the rules to accommodate these arrangements, and even where they do on some occasions this will only be backdated to when the law was changed therefore people who believe they are entitled to benefits may not actually receive what they expect.
3. Pension taxation considerations - pension taxation has changed considerably over the last 10 years, most significantly with the introduction of the lifetime allowance and annual allowance regime. Individuals, even with relatively modest earnings but a long career or people who have large increases in salary in a particular tax year could see themselves faced with a tax bill because their annual allowance has been calculated in excess of the £40,000 limit. Anybody with a pension benefit in excess of £50,000 per annum in a final salary scheme will face an income tax charge when they take their benefits. While it’s important to understand and quantify the implications of taxation, this does not always lead to a need to transfer benefits from a defined benefit scheme, and is only one of the factors taken into account.
4. Financial security of the scheme - financial security is probably one of the most topical issues in relation to defined benefit pension schemes. With recent highly publicized failures such as BHS, Carillion and most recently - British Steel, this has become a matter of great concern for many people in final salary schemes. It is important to understand that where the scheme may have a deficit, the long-term financial standing of the scheme is based on the sponsoring employer’s ability to continue funding the scheme. The employer also has a legal requirement to make provision in their accounts for any shortfall in the scheme and agree a funding schedule with The Pensions Regulator which has to be approved and details published to members.

What can happen to scheme members’ defined benefit pensions if their employers become insolvent and the scheme doesn’t have enough funds to pay their benefits?

As mentioned above all schemes are backed by an employer’s covenant, and there is a charge over the employer’s assets effectively, which can be called on to meet scheme deficits. Where the employer fails and there are insufficient assets available, then there is the option of going into the Pension Protection Fund (PPF). This is a government-backed scheme funded by other occupational pension schemes and provides a level of protection for members where the sponsoring employer has gone into liquidation or otherwise failed. There are some limitations on the benefits that will be provided, in that only 90% of the benefit is guaranteed, and there is a cap on benefits which is, £39,006.18 (equating to £35,105.56 when the 90% level is applied) per year, from 1 April 2018. This is set by DWP. It is important to note that the government does not underwrite any guarantee provided by the scheme, on the compensation paid by the PPF is limited by the funds available.

What would you say are the specific challenges of assisting clients with defined benefit schemes?

One of the main challenges is helping members to properly understand the benefits they have accrued in the scheme and their value, and to dispel some of the myths and misconceptions that are prevalent at this time. It is essential to show the benefits in a proper context, and how these compare with the alternatives available. One of the ways we do this is by using cash-flow planning to project future inflows and outflows and compare this with the financial impact the members’ financial resources. This helps to show how achievable or not the retirement plans are, and to look at all the potential ‘what if’ scenarios, especially early mortality, poor investment performance and potentially running out of money if they were to transfer the benefits.

Another challenge is to explain the loss of guarantees, on the impact of charges and investment risk. It can be difficult to see past a large lump sum and consider the actual income benefits that the plan provides. When dealing with individuals who have little or no investment experience, and possibly, this will be the first time they have dealt with financial adviser sought advice of any kind, it is important to ensure that explanations are provided in a manner that the individual can understand and that the gravity of the loss of guarantees is properly explained and demonstrated.

In the progression of your career, how are you developing new strategies and ways to help your clients?

Our approach for dealing with all our financial planning clients is the same regardless of whether or not they have a defined benefit scheme. We take a holistic approach which takes into account the stated objectives and all the financial resources. We then complete our financial analysis which establishes their needs. In this way, we not only consider what the client wants, but what they actually need in order to achieve their goals in the future.

We have developed a very detailed, client-centric process, which focuses on communication and providing high levels of professional service to our clients to achieve their ultimate goals. We continually review and amend processes to ensure continued delivery of the promised services and to improve these where we can, and we are always investigating new and better ways to improve communication with our clients.

We are also embarking on a research programme to develop a specific investment strategy to   match the flexibility and challenges provided by pension freedoms and flexible drawdown.

If you could, what would be the one thing you’d change about defined pension schemes?

It would be a great improvement for members of defined benefit schemes if there was more clarity in relation to what they should expect from financial advisers in the provision of advice. Also, clarification the obligations of trustees to provide the information required to enable financial advisers to properly assess the members’ benefits as part of this process. Currently, the Financial Conduct Authority regulate financial advisers as set out the standards for the provision of advice, and The Pensions Regulator sets out the obligations for trustees in terms of the provision of a statutory cash equivalent transfer value and the information it needs to be provided with that. There are no specific rules or guidelines laid down for trustees in relation to the information that they should provide to financial advisers, and on occasions this can cause problems and delays in obtaining the information in a timely manner.

Also, from a members’ point of view, more availability of partial transfers from defined benefit schemes will be greatly advantageous. Currently, while the legislation allows this, there is no obligation on a scheme to offer this to members.

What is your overall piece of advice for Finance Monthly’s readers in regards to defined benefit schemes?

Take time to understand the value of the benefits you have, in the context of your own personal circumstances. It’s important that individuals fully appreciate the exact benefits that they, or their family will be entitled to during their lifetime and in the event of death. Being offered a large lump sum of money can seem very attractive, however that money could run out at some point is important to ensure that they have a plan B that is realistic and feasible if this happens.

Do you have a mantra or motto you live by when it comes to helping your clients with defined benefit schemes?

This is the biggest financial decision they will ever have to make and it will have an impact on the rest of their and their partner/spouse lifetime. It is a huge responsibility on the shoulders of the adviser to provide proper and accurate advice, as there is no going back once this decision has been made.

Sandy Tao Chen serves as Executive Director – Head of Trusts of the First Advisory Group’s Hong Kong branch and its entities. First Advisory Group is a wealth planning group that was founded in Liechtenstein in 1954.

Sandy’s professional career has been split between New York and Hong Kong, having accumulated more than 20 years’ experience in the provision of wealth planning solutions, specializing in asset protection and succession planning.  She is a full member of Society of Trust and Estate Practitioners, the NYS Certified Public Accountant (CPA) and is a member of AICPA. Below, Sandy speaks to Finance Monthly about First Advisory Group and trust and wealth planning trends in Hong Kong.

Tell us about First Advisory Group and its mission?

First Advisory Group is a leading independent financial services provider with offices in Geneva, Hong Kong, Panama, Singapore, Vaduz and Zurich and has more than 300 experienced employees working around the world to fulfil this commitment. With expertise backed by 62 years’ experience and a diversity of external specialists, the Group offers an independent, one-stop and results focused advisory service for its clients’ wealth management needs.

Furthermore, the Group has formally operated in Hong Kong as a jurisdiction for a number of years, establishing a physical presence in 2010. First Advisory is present and active in all-important financial and business centers worldwide. With its head office in Vaduz, Liechtenstein and further offices in Zurich and Geneva, Switzerland, the Group offers unique locational advantages to its clients, i.e. banking and professional secrecy, highly flexible company law, high legal certainty, high political and economic stability and continuity, highly professional approach to financial services and central location in the heart of Europe.

First Advisory Group offers further attractive locations to its clients in Asia, namely Hong Kong and Singapore, as well as in Central America.

How can trusts be set up and structured in Hong Kong?

• English common law concept;
• One party (Settlor) has a fiduciary arrangement with another party (trustee);
• Settlor transfers legal title of assets to the trustee to hold “in trust”;
• Trustee Holds in trust for the benefit of a third party (beneficiary);
• Protector may be appointed to safeguard interest of beneficiaries.

How can trusts provide tax efficient solutions for clients?

• Minimization of income, estate and inheritance tax;
• Pre-immigration tax planning or planning for returned citizens.

What other wealth planning structures are available in Hong Kong?

At First Advisory, we offer clients diverse and innovative wealth planning services through a single platform. These include international asset structuring by using trusts, foundation and/or corporate solutions. The Group is positioned to deliver a dynamic and sophisticated service, precisely tailored to client needs.

Can trusts be structured in such a way that they can be open to abuse? Which preventative measures can be taken?

Although under the modern trust laws, settlors are given certain powers (i.e. investment power) on the trust, to executive certain investment decisions. The Group’s compliance has taken precautious measures to make sure that we, as a trustee, have the full discretionary power on the trust fund distributions. The investment powers given to the settlors/beneficiaries are only at the limited power of attorney basis. If there is a private company held under the trust structure, one of our Group subsidiaries must act as the director and shareholder of the company. Our compliance department has implemented a strict and powerful system to monitor our clients on an ongoing basis to make sure they are not involved in any legal transactions i.e. money-laundering, drug-tricking, etc.

What makes First Advisory’ services unique when compared to your competitors in Hong Kong?

First Advisory Group offers an independent, one-stop advisory service for our clients’ wealth management needs.

The wealth planning solutions that our Hong Kong office offers are flexible and enduring, aiming at smooth transitions of wealth from generation-to-generation. As all the services derive from one single platform, the Group’s offices can guarantee a seamless and effective solution for our clients. We are one of the very few independent trust companies in Hong Kong that can provide both trust and foundation wealth solutions to high-net-worth clients.

Contact details:

Telephone:  +852 2537 9478

Facsimile:   +852 2537 9476

Email: sandy.chen@first.li

To hear about mortgage misconceptions and the challenges that potential homeowners face in California, Finance Monthly talks to broker and owner of Mortgage Express – Carole Ryan.

What are the key misconceptions among buyers in relation to mortgages?

Buying your first home should be an exciting and fun endeavour, but I think a lot of potential first-time homebuyers are held back by misconceptions of the loan approval process and the fear they may not qualify. Two of the biggest misconceptions are that they need 20% down and perfect credit. But not anymore - Fannie Mae’s, HomeReady mortgages, and Freddie Mac’s

Home Possible® and Home Possible Advantage® mortgages are new and innovative conventional programs that bring a whole new set of underwriting guidelines to help more low to moderate-income borrowers realize their dream of home ownership. Down payments of 3%, FICOs starting at 620 with most lenders, and higher debt-to-income ratio’s in some circumstances.

Another change by Fannie and Freddie that took effect on 1 January 2018 will also help buyers buy more with less down. The conforming and high-balance loan limits were increased. Now buyers can put 3% down on loans of up to $453,100, whilst in high-balance areas, from $453,101 to $679,650, the minimum down is 5%. The bottom line here is that if you are seriously interested in buying a home, there are options out there to help your achieve your dream of homeownership. The only thing that you have to do is to take the first step - find a good lender and get preapproved.

What are the key challenges that your clients face before applying for a mortgage and how do you help them overcome them?

As a broker with over 25 years of experience in mortgage lending, I work with all types of buyers. I find that almost all of the clients that I advise face challenges revolving around what I call the BIG 3 - income, credit and funds to close. If we have a debt to income issue, we look at adding a co-signor, and/or paying off debt, or as a last resort - buying less. I help borrowers resolve minor credit issues that don’t keep them from getting a loan, those with major issues, I refer to a great credit restoration company I work with.

There are several solutions for funds to close. The easiest one being a “gift” from a family member, a lender credit, based on the interest rate chosen, a seller credit, a loan against or liquidation of a 401K, and of course a variety of down payment assistance programs.

What makes your company unique when compared to your competitors?

What makes me and my company unique is very simple - I’m able to provide incredible hands on service to my clients, built around their schedules and needs. Mortgage Express is my company and I handle all of the loans that I work on personally - from pre-approval to close of escrow. This allows me to oversee my files, keeping everyone involved in the transaction updated and being sure we’re always on track to meet the closing date. I meet with borrowers on-line in a unique screen share, based on the time of day, night or weekend that is convenient for them, whilst they can attend from the comfort of home. This allows me to show them, in real time, how their income, debt and assets affect the loan they can qualify for, as well as ways to restructure the loan in different ways, based on their needs. All of this as they watch, ask questions and request changes. It’s also a great opportunity for me to educate them about the processes we will be going through so they know exactly what to expect, including our time frame and the items I will need them to take care of. No screen share would be complete without an explanation of how lenders pricing works, showing them the different interest rates, and how pricing adjustments affect the options they will choose from. We wrap up with me preparing an estimate of funds needed for closing. The real magic starts when they get an accepted contract and escrow is opened. In a matter of a few days, I have the loan submitted, appraisal ordered and our initial loan approval. My average closing time is 21 days.