On 12 August 2020, the FCA published a “Dear CEO” letter relating to the increase in levels of client money held by firms providing non-discretionary investment services. The letter asked wealth managers to consider whether “it would be in [their] clients’ [best] interests to place these balances directly with their own current or savings account providers”. While in the first instance this is aimed at execution and advisory investment services, it must also put pressure on the discretionary service providers to make sure their house is in order.
What is the point of returning money to the customer if all they can do with it is get one base point of interest? On top of this, the potential penalty for earning this interest is that the investor might miss the market when, out of the blue one day, it is announced that a vaccine has been effective.
A Virtual Bank Account Solution Can Help
Virtual bank accounts allow a wealth manager to replace their client’s internal ledger accounts with fully functional virtual bank accounts connected to its real client’s real pooled bank account. All client money remains in the real pooled bank account, but this real account is now controlled by the individual client virtual accounts.
Virtual bank accounts provide dual ledgers, reflecting cash and future-dated positions. Using these records, wealth managers can perform more aggressive liquidity management on client funds and place more of the pooled funds out on longer-term interest-bearing deposits. Our Liquidity Management paper is free-to-download and offers more information on this.
Virtual bank account platforms can then allocate the interest earned on the pooled accounts to the individual client virtual accounts. They can also calculate and pay interest on the virtual accounts, at a pre-agreed rate that allows wealth managers to retain some share of the interest earned. All this is done automatically, allowing the wealth manager to deliver the service efficiently.
Three-Step Strategy to Uphold Compliance
There are both defensive and offensive aspects of this challenge. The wealth manager must:
- Satisfy FCA Requirements
- Give clients an improved cash investment product
- Improve clients’ retention of client’s cash funds
- Create upselling opportunities
Businesses should start by configuring a virtual accounts solution to report on all virtual accounts that have had large balances for longer periods of time. Remember, this will not be a one-off process; you will need to build an ongoing monitoring solution. The dashboard and reporting tools in Cashfac’s solution can deliver this effectively and efficiently.
You could then use these reports to schedule reviews with relevant clients, alert them to any issues and recommend a move to either an interest-bearing trading virtual bank account, or the setting up of a separate interest-bearing deposit virtual account from which, perhaps, funds could be swept automatically when required. In fact, multiple virtual deposit accounts could be setup with different terms and interest rates. A virtual account can be reconfigured to pay interest at the flick of a switch. A new virtual deposit bank account can be setup and linked to the client’s trading account in seconds.
The review itself may just about satisfy the FCA but offering the client an improved product (particularly in the current market) must surely give wealth managers an unassailable case for retaining the clients’ funds which they can put to the regulator.
However, perhaps more importantly, it also gives the wealth manager an upselling opportunity which would surely merit a percentage increase in revenue even among the fixed-fee brigade.
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