Has wealth management become I-banking's big brother?

One question to consider is whether wealth management – often regarded as junior to its brash, investment banking brother – is now emerging as the stronger sibling.

Swiss bank UBS is a case study in point. It should also be instructive for Asian wealth managers to take note of the unfolding impact of the Vickers Report in the UK, as well as broader industry developments emanating from the sovereign debt crisis in Europe.

The trials of Switzerland’s largest bank have been well documented in the past few years. It appeared UBS was rebuilding after surviving a government bailout in 2008; it had settled its long-running tax dispute with US authorities and had recently put its head back above the parapet with marketing campaigns centred around Formula One and a new slogan: We Will Not Rest. 

Such efforts were having a positive impact on its wealth management business, with net new inflows for four consecutive quarters and strong asset inflow from Asia, and the ultra high-net-worth (HNW) segment globally.

One can only imagine Oswald Grübel’s dismay as news filtered through that one of his traders had not rested, but rather been arrested at 3:30am on a London trading floor.

Apparently risk managers at the bank had been aware of the situation for days and were desperately trying to assess the scale of the loss ($2.3 billion) and minimise the damage.

Grübel, formerly of Credit Suisse (and now also formerly of UBS), has borne the brunt of both investors’ and the board’s loss of confidence and tendered his resignation.

What will be interesting to see will be how its private banking clients react to this news. If they accept that no client funds were at risk, and that controls at the wealth management business remain robust, assets should stay. The figures will tell the story

One obvious impact of this risk oversight is that it will accelerate restructuring of UBS’s investment bank, with reports indicating that widespread cuts are planned – except, most importantly, to areas directly supporting its private banking effort.

It looks likely the re-structured group will emerge as a more focused wealth manager, with asset management and investment banking functions designed to complement the aims of the private bank. Little brother is growing up fast.

Perversely, one consequence of the sovereign debt crisis emanating out of Europe could be positive for wealth managers such as UBS.

While the latest plan to enhance the European Financial Stability Facility passed a major hurdle in the German parliament, it’s still unclear how things will unfold this quarter, and this presents a challenge for investment strategists whose clients are looking for guidance and options.

“People are worried about the wider market, and Europe in particular,” says one UK fund manager. “In the past if clients did not like the look of the markets they would simply put their money in cash, but at current rates that is unattractive. Or they would put their money into bricks and mortar. But the UK housing market is flat and finance is difficult to come by. So we are seeing people just staying put.”

For banks this is no bad thing, since clients tend to stick with the devil they know, especially if there are no compelling reasons to switch. Certainly that is something UBS would settle for now.

Of course, while managing quasi-global and regional responses to the crisis is taking up a lot of time, many countries are looking to fix things closer to home.

The long-awaited Vickers Report from the UK’s Independent Banking Commission was released last month. It had been widely anticipated as the final judgment on whether the UK’s banks should be broken up in a wholesale re-enactment of Glass-Steagall.

In the end, that did not happen. Instead, banks in the UK will have to put a robust ring-fence around their retail and small business deposit and overdraft business. This activity will have its own board and a higher capital requirement of 10% of risk-weighted equity and loss-absorbing capital of 17-20%.

Outside the ring-fence will be securities trading, debt and equity underwriting and derivatives activity. Banks can then opt whether to put their other activities, such as consumer lending, trade finance and so on, inside or outside the ring-fence.

So where does this leave the wealth management businesses of banks? The answer is in an uncomfortable position.

Vickers notes that HNW customers have multiple banking relationships and so are better placed to withstand the shock of a single bank failure. It concludes that some HNWIs will want to put assets outside the ring-fence to access the markets and should be permitted to do so. In other words, it looks likely that HNW business will straddle the fence.

Vickers calls for regulators to step in to place stringent limits on the type of customer and customer business that can be conducted outside the ring-fence to avoid abuse of the ruling, but ultimately, it is likely that the wealth management business in the UK will be divided into ring-fenced and non-ring-fenced activity.

Broadly, the reaction of the industry has been to look at the start-date for the new regime – currently set for 2019 – then file it in the “not urgent” compliance category.

However, there is a danger that the detailed regulation on how to deal with different kinds of HNW business will run away if the industry does not get involved in consultation early on.

If not, once again client segmentation strategies and the UK value proposition will be more strongly dictated by regulatory requirements than by what really matters: client needs.

While it may be tempting for wealth managers in Asia simply to focus on growth in their region, they have to keep one eye trained on developments in Europe and the UK. Risk management, asset allocation and regulatory change do not respect regional boundaries.