Half of the UAE’s financial advisory firms have grown their businesses over the last year despite operating in a tougher environment filled with rising costs and regulatory changes, according to a new report from the consultancy Insight Discovery.
Fifty-one per cent of advisers surveyed for the eighth edition of the Middle East Investment Panorama, have more clients or active clients than they did a year ago, however, one in five said they have experienced a contraction in business as a result of fewer clients.
"Things were rather grim last year, and we entitled the report The Year of Reckoning. At that time, 63 per cent of advisers saw client engagement - or lack of it - as a threat. Only 18 per cent saw it as an opportunity. Despite the concerns of 2016 and against the backdrop of impending regulatory changes, advisers continue to experience an increase in client requirements," said Nigel Sillitoe, chief executive of Insight Discovery.
The report, which this year focused on advisers, addressed the raft of new regulations currently challenging the UAE’s financial advice industry.
The UAE Insurance Authority (IA) and the Central Bank of the UAE have both issued circulars this year outlining changes to the way savings and investment schemes are sold in the UAE.
The IA’s second draft circular, released in May as a follow up to its 2016 release, reinforced its plans to cap total commission payable to entities involved in the sale and distribution of insurance products, such as financial advisers; it also outlined plans to ban the use of charges such as advice fees and trailing commission fees on the products sold and restrict surrender charges.
The Central Bank also issued a circular in May advising banks and finance companies to resolve all outstanding mis-selling complaints “amicably” and within a deadline of just 90 days. It also said it was refusing to approve requests from banks or finance companies to market or sell “savings and investment” and “non-capital guaranteed/protected takaful/insurance products”.
Both agencies were responding to a raft of complaints from customers over expensive fixed-term investment plans.
According to the Insight Discovery report, one in four advisers in the UAE consider the regulations a threat with three in ten having negative views of commission caps and higher disclosure.
The report reveals that collectively, the advisers gain about 72 per cent of total income from initial fees and commission.
The report also found that eight in ten advisers think clients are becoming more knowledgeable – perhaps reflecting the growing preference among some UAE residents for managing their own personal finances.
A raft of groups have emerged in the last couple of years, such as the nonprofit personal finance community, the UAE Bogleheads Chapter, where amateur investors share tips on DIY investing.
The report also highlighting how advisers are switching to new products to gain customers; at least 40 per cent of advisers have increased usage of life protection and general insurance offerings.
This comes after insurer Friends Provident International (FPI), one of the biggest providers of expensive fixed-term investment plans, has admitted that the products were failing customers.
Philip Cernik, FPI’s chief marketing officer, said that the life industry “could do better”.
Andrew Paul, senior executive officer at Aberdeen Standard Investments, said:: “This report shows how the advisers’ are responding to their clients’ changing needs by increasing usage of some products and reducing usage of others.”
Another regulatory effect on the financial advisory industry was the IA’s decision in July to strengthen its capital adequacy regulations.
According to the IA's Decision circular, brokers must maintain paid-up capital levels of 100 per cent with failure to do so risking intervention from the IA and even suspension of the broker.
Any reduction in capital must be approved by the IA and where this figure falls below the minimum level of Dh3 million, a corrective plan must be submitted by the broker.
“The insurance broker shall not resume its business, unless it achieves (100 per cent) of the paid-up capital required to practice the activity,” the circular said.
This has had a direct impact on firms, with seven in 10 advisers admitting that compliance costs have risen over the last year while 69 per cent say regulatory costs have grown.
However, macroeconomic factors such as falling rental rates have helped to keep financial firms afloat: 13 per cent of advisers said that property rental costs as well entertaining and hospitality expenses have fallen.
Mr Sillitoe added: “Regulatory change has been a front of mind topic for advisers since we began our reports back in 2010. It is very encouraging that the numbers of optimists and pessimists are evenly balanced, and that advisers have been able to cope with the rising costs associated with regulatory change."