Economic downturn threat should be taken seriously by private market operators to mitigate mis-selling riskDavid Newman
- Lower liquidity of private markets investments could present concerns for investors seeking to divest in an economic downturn.
- Financial institutions promoting private markets to their customers should check now that their regulatory controls are compliant and robustly documented to mitigate potential for mis-selling claims.
- Firms using technology to present and distribute deals should have a clearer and more robust audit trail.
The economic slowdown should act as a warning sign for firms promoting private markets to their clients, with regulatory processes likely to be placed under greater scrutiny as investors explore divestment options, says fintech Delio.
The lower liquidity of private markets means it is much more difficult for investors to divest if they become unhappy with the investments they have made. This is more likely to happen if they find their income or assets squeezed in other areas, something we are already seeing as other costs continue to rise and inflation hits levels not seen in more than 40 years.
David Newman, co-founder and chief commercial officer at Delio, warns: “As the reality of the economic climate begins to bite, we are asking financial institutions whether they are prepared for greater regulatory scrutiny and how well they have been documenting any private markets business that they have written. The FCA quality controls on retail investing mean organisations need to be prepared for any increase in regulatory oversight. They also need to be sure they have all their ducks in a row when it comes to making sure that they have been promoting these private market investments to the right type of investor.
“Often, it’s only when the music stops that we start to see where things could have been done better. While no-one has a crystal ball, it is evident the economy is heading towards a rockier period. So, now is the ideal time for companies to double down on their regulatory processes to ensure they don’t fall foul of complaints further down the line.”
The democratisation of private markets has allowed greater numbers of investors to get involved in what has been one of the top performing investment sectors for more than a decade. The obvious appeal of returns that have consistently out-performed public markets has meant that private markets have become an increasingly popular offering to investors that have been keen to diversify their portfolios.
However, if proper regulatory controls have not been implemented by the firm promoting the investment opportunities, there are likely to be serious questions to answer about whether potential investors have been presented with deals that are aligned to their regulatory classification and whether or not they could potentially have been mis-sold.
Newman added: “The issue is about ensuring all of the correct processes have been followed when deals have been presented to clients. It isn’t enough to think or know they are right, they must be clearly documented and auditable. Without both of these elements, there is a risk that the promoter could face regulatory or client action, which we all know is much more likely to happen when things are going wrong than when they are going right.
“The downturn is starting to bite, and now is the time to make sure all regulatory processes have been correctly followed. Any gaps or missed communications must be dealt with at the earliest opportunity to ensure there is no possibility that, down the line, there is a regulatory issue affecting a business.
“The reality is that any problems arising within the private markets space could have an industry-wide impact, rather than just within any single company. This is not just bad news for one private markets promoter; the ripple effect could also create wider questions and lead to greater difficulties for others in the sector.
“So, it is important for all of us to be sure that we have conducted our business correctly, and that investors are happy to weather any storms on the horizon.”
For more information on how Delio’s private markets technology helps financial institutions to mitigate regulatory risk, click here or get in touch with our team.