Private banks eye gains from IFAs' reform woes

LONDON (Reuters) - Private banks are preparing for a surge in assets sparked by proposed new regulations which they expect will punish the country's independent financial adviser industry.

The Financial Services Authority is proposing to increase minimum qualification requirements and replace commission-based selling common among IFAs with fees for advice. A consultation period ended on Friday and new rules are expected in 2012.

The move towards a fee-based model -- with higher regulatory costs -- is widely seen as a greater burden on intermediaries, while private banks have traditionally used the fee-based model to sell banking and investment services to wealthy clients.

And, as they struggle to build assets at a time when little new wealth is being created, many see a shakeout among IFAs as an opportunity for expansion.

"There is a real cost challenge for the IFA sector and the higher end (advisers) might well be thinking: this is going to get very difficult," said Clive Cunningham, a partner specialising in wealth management at lawyers Taylor Wessing.

He said many would look to move their business into a larger organisation that can sustain the necessary infrastructure. The private bank could do a deal to allow access to the IFA services with a view to absorbing them at a later date.

Other private banks may buy client lists from firms who are exiting investment management ahead of the new rules.

Tracey Reddings, head of UK private banking at SG Hambros, the British wealth management arm of Societe Generale (SOGN.PA), said the bank has set itself a target of adding 1.3 billion pounds in new assets to the 9 billion pounds currently under management over three years by attracting intermediaries.

She also expected the bank to benefit from financial advisors leaving the industry instead of trying to meet all the new requirements.

"We are going to see a number of IFAs looking to sell over the next couple of years rather than jumping through hoops," she said, noting the average age of UK financial advisers is 55.

According to the Financial Services Authority, there are 5,480 authorised firms providing advice in the UK.

ACQUISITION OPPORTUNITIES

The likely exit of some advisers due to the new rules offers a chance for wealth managers to pick up assets.

British brokerage Collins Stewart CLST.L said earlier this month it planned to double assets at its wealth management division to 10 billion pounds, taking advantage of businesses up for sale ahead of the review.

Schroders' (SDR.L) private banking arm has also said it plans to expand through acquisitions and by attracting new advisors and their client lists.

The prospect of more onerous regulation is at least part of the reason for some deals in the sector: Lloyds (LLOY.L) sale of assets to Rathbones (RAT.L) and Edinburgh solicitors Lindsays' disposal of its investment management business to private bank Brown Shipley in September.

Jason Butler, 40, a parter at financial advisors Bloomsbury Financial Planning, who described himself as "passionately anti-lazy, high-cost private banks", disputed the assumption that wealth managers had more to gain.

He said the new system would allow intermediaries to run more profitable businesses by forcing investors to pay fees reflecting services provided -- effectively passing on more costs to the consumer.

"I would suggest private bankers don't get the Dom Perignon out too quick," he said.

But compliance costs are higher under the fee based model because advisers must prove their independence by conducting all of the market research. By joining a private bank's platform intermediaries would gain access to these resources.

And a report commissioned by the FSA earlier this year on the likely impact of the changes estimated that around 10 percent of advisers would take early retirement rather than study to attain the new qualifications.

Catherine Tillotson, head of research at specialist consultancy Scorpio Partnership said greater convergence between the two models that often compete for the same clients but have little contact was an inevitable outcome of the reforms.

"Private banks and IFAs are still not talking to each other because there aren't the forums for it to happen... Now it's all coming together," she said.

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(Editing by Sitaraman Shankar)