Firms must improve their regulatory governance in private markets
Firms that operate in private markets without effectively using technology risk causing ‘investor harm’ and significant reputational damage to their own company by struggling to comply with the Financial Conduct Authority’s (FCA) regulations.
The blind spot in regulations
The problem exists for firms of all sizes – from enterprise institutions to boutique advisers – as the “blind spot” in regulatory compliance is not being addressed. This is often because organisations operating in this sector are not sufficiently aware of the regulations they should be complying with.
Some of the most common challenges that firms face include:
- Implementing robust governance around deal distribution
- Accurately profiling investors
- Overcoming antiquated document and data management systems which make it difficult to audit client files effectively
According to research carried in our 2019 report ‘Private markets in wealth management’, 65% of firms said the challenge of consistently achieving full regulatory compliance was the main obstacle to launching their private market proposition.
Yet, investor appetite for private markets has grown significantly over the last decade and looks set to continue thanks to consistent returns and greater interest in areas such as impact investing. With investment growth averaging 20.1% over five years and 14.2% over 10 years, compared to 7.5% and 8.1% respectively in the FTSE All-Share, firms need to understand regulatory compliance isn’t going away and it needs to be addressed with urgency.
Gareth Lewis, Co-Founder and Chief Executive of Delio, said: “We have been working in this sector for more than five years, yet we are consistently shocked at how difficult some firms are finding it to meet their regulatory requirements.
First and foremost, any firm operating in private markets without robust regulatory frameworks in place is failing their clients. That’s before you even consider the repercussions of non-compliance for the firm itself, which could result in fines and potentially compensation to investors that have been mis-sold.
Focusing on alternative investments
Earlier this year, the FCA highlighted alternative investments as a key area that it will be focussing its attention on in 2020/21, with unverified reports that the regulator is already contacting firms as part of an ongoing review. The FCA itself said that although the letter mentions potential further work being undertaken, it “can’t confirm what that work is unless we make it public”.
However, because private markets are a relatively complex regulatory area, many companies “don’t know what they don’t know”, said Mr Lewis. He added:
“Many of the processes involved in private markets, from deal distribution through to properly identifying suitable investors, can create regulatory pitfalls. Firms who fail to see the benefits that technology can offer in these areas are taking unnecessary risks with their own reputations and, worse, client investments. Digital tools remain under-utilised by firms, with only one in four institutions reporting that technology plays a core role in how they deliver unlisted investment opportunities to their clients. Yet, digitisation of these processes could minimise such risks through the automation of document sign-off, approval tracking, proper and auditable investor profiling and so on.
If companies continue to provide private markets services to clients using traditional methods rather than technology to enhance their compliance, they will inevitably come unstuck. It’s time for any firm that is serious about offering unlisted investments to take control of their regulatory obligations for the benefit of their clients and their own reputation .”