Simon-Kucher & Partners: Pricing Transparency and Fee Disclosure - The New Era of Private Banking in Asia

Simon-Kucher & Partners’ Dr. Silvio Struebi, Partner, and Alan Lim, Senior Director, share their perspective on the key pricing and discount management challenges being faced by Asia’s private banks, and discuss the ways firms can effectively handle risk and compliance while maintaining commercial feasibility.

By Dr. Silvio Struebi and Alan Lim, Simon-Kucher & Partners – the original piece can be found HERE.

Similar to the introduction of the legislative framework MiFID II in Europe, regulators in Asia have stipulated greater regulatory compliance requirements for investment sales and advisory practices with a focus on pricing transparency and fee disclosures. Financial institutions are required to uphold high standards of market conduct and transparency in their dealings with clients to foster greater trust.

Private banks that do not adjust their pricing practices risk getting reprimands or penalties from regulators. Hence, it is crucial to revise existing pricing and discount management approaches to achieve a sustainable banking model.

In addition, it is an ideal opportunity for private banks to take a step further by developing smart pricing strategies to prevent profit erosions. Commercial feasibility has to also be considered because if the focus is solely on risk and compliance, this will lead to shrinking transaction margins and the high exposure of transaction income will significantly lower clients’ RoA.

What are the current pricing transparency and fee disclosure challenges for private banks?

In Singapore and Hong Kong, there have been fines recently imposed on financial institutions for pricing misconduct. It was revealed that private banks have failed to adhere to the client’s agreed spread or price when the price of Over-The-Counter (OTC) product improved during market order execution. This resulted in overcharging clients in excess of the fees communicated in the fee disclosure documents.

With regards to pricing transparency and fee disclosures, below are several key challenges which private banks in Singapore and Hong Kong are currently facing:

• A lack of management oversight on pricing policy application, along with inadequate pricing system control, sales surveillance, and reporting process
• A lack of clear, tangible industry guidelines and framework for pricing transparency in the region
• A relatively high level of discretion by Relationship Managers over fees charged, including commissions and spreads, and
• Lack of communication on fees for wealth products and services.

Having a greater emphasis on pricing transparency and guidelines will be the logical development for regulators in the region. However, fee transparency does not stop at disclosure. The banks should also ensure clients understand what they are being charged for with clear communication on fee breakdown. This will reduce the risks of interest misalignment between the banks and clients.

It is inevitable that new regulatory guidelines will be introduced in Singapore and Hong Kong, and when this occurs, banks will have to comply to the guidelines rapidly. Concurrently, with intense competition, banks will need to develop sustainable revenue measures such as shifting from transactional to recurring revenue to fence potential revenue decline. A systematic process to determine the transition plan and strike a balance between the regulatory compliance and profitability is critical.

How to enhance pricing transparency and fee disclosure

There are multiple solutions to address these challenges. Here we have identified seven effective measures to enhance pricing transparency and fee disclosures:

1. Set commercially viable standard prices on fee schedule

Standard prices or list prices on a client’s fee schedules are often set as the maximum price that a client can be charged. However, these price levels are generally set too high by most Asian private banks without considering commercial feasibility. Implementing a list price reduction without adversely impacting the current revenue is a complex task. This requires a thorough analysis on client data and past transactions, in-depth market knowledge, and well-thought through justifications from all stakeholders’ perspectives.

2. Archive individual client’s charges and fees accurately

The fees set-up for the client’s portfolio should be accurately reflected in the core banking system, and all bilaterally agreed pricing arrangements with clients should be agreed ideally as part of the client onboarding process, properly archived, and reviewed in a timely manner. Banks can leverage on the accurate documented records for greater management oversight and also better evaluate their pricing and fee structures for clients.

3. Develop a well-defined discount management framework

Banks need to set up a robust discount management framework with a well-defined discounting policy that covers clear rules and guidelines for granting client’s discounts. Ideally, the entire discounting management framework is supported with an automated discount approval workflow to minimize errors. Clients’ pricing should be reviewed by the bank on a regular basis based on a set of clear KPIs to ensure market relevance.

4. Improve pre & post-trade system controls and sales surveillance process

Banks need to build in system validation checks in their order-entry systems to identify deviation from the list price or client agreed pricing to avoid overcharging and/or unfair handling of clients. In addition, system control (hard blocks) should be implemented to avoid overcharging clients at all. Post trade sales surveillance checks performed as an ex-post price control are required to monitor any post-trade price movements or price changes by RMs, especially for OTC structured products and bond spreads. Where possible, banks should leverage on the use of technology to automate the process and generate monitoring reports for auditing and management oversight.

5. Design clear pricing and fees communication guidelines

Proper fee communications, including price improvement in trades and detailed post-trade client advice, should be provided to clients in a timely and transparent way. Banks need to enhance their communication channels to deliver live updates by employing various methods such as mobile alerts, email notifications, etc. Besides, any deviation from the agreed client pricing should be justified with an official approved communication channel such as written documents, voice log, or other measures. Fee and discount schedules as well as client-agreed pricing should be sent out to clients in writing and the rationale of calculations should be explained as well.

6. Strengthen governance and risk framework to enhance management oversight

The bank’s senior management should ensure sufficient emphasis on pricing issues while front office and control functions should be made more aware of the importance of pricing controls and disclosures. Moreover, clear accountability and responsibility with KPIs should be defined to monitor the sales and advisory activities. Reporting and monitoring processes should be further streamlined to better mitigate the risks but also to perform revenue management activities such as discount reductions for clients with very low margins. With a strong focus, both on risk and profitability, this will set a clear tone from the top management in achieving desired employee behavior for fair dealing and treating customers fairly.

7. Steer Relationship Managers’ behavior by emphasizing pricing excellence and aligning the incentive system

As RMs are usually the first point of interactions with clients, highlighting the importance of pricing transparency is extremely important. In addition, private banks have to align their remuneration with a balanced scorecard comprised of both quantitative and qualitative criteria. The current revenue targets and AuM goals should be complemented with other non-revenue goals such as client satisfaction, proper conduct, and compliant behavior and service excellence. This will better steer and influence positive staff behavior in driving better outcomes for the clients.

Future-proofing revenues through pricing transparency and fee disclosures

The wealth management industry in Asia has remained opaque for too long. With strict requirements for greater fee disclosures, it is becoming a priority for all players to embrace transparency which will further support Asia as a reputable wealth management hub.

In conclusion, with declining transaction-based revenues, it poses a higher risk for pricing misconduct to achieve the same revenue target as before. In order to compensate for the loss of transaction-based revenue, private banks should drive more recurring revenue and develop alternative smart pricing strategies and additional income through new services. More importantly, this will also allow private banks to enhance profitability, have a more effective oversight and foster client trust.

Please CLICK HERE to contact either Dr. Silvio Struebi or Alan Lim.