Five ways to overcome regulatory challenges in private markets
Insights

Five ways to overcome regulatory challenges in private markets

18th July 2022

Alternative investments are often perceived as being a high-risk offering that require complex regulatory frameworks and robust operational governance. In fact, our research found that 50% of firms cited regulatory challenges as a significant barrier to them launching a private markets proposition. 

With consistent and significant returns bringing alternative assets to the attention of private investors over the last decade, wealth managers can no longer afford to ignore client demand. This shift in approach has created a significant opportunity for wealth managers to open up access to a new suite of opportunities that will cater for the increasingly entrepreneurial outlook of their wealthy clients. However, it also brings a series of unique regulatory challenges that they have previously never had to deal with.

There are typically five main regulatory challenges associated with private markets:

  1. Investor profiling and deal suitability
  2. Data and document management
  3. Cross-border promotion of investment opportunities
  4. Internal governance and approval processes
  5. Transparent regulatory reporting 

The use of technology offers significant opportunities for wealth managers to reduce their regulatory burden, particularly when it comes to private markets. Gareth Lewis, chief executive of Delio explains: 

“In the last decade, I’ve spoken with hundreds of financial institutions as they look to enhance how they offer their clients access to alternative investments. As demand for this access has grown, many firms have found themselves in a position where their manual regulatory processes have been at risk of being overwhelmed by the volume of deals and investors that they are now working with. Understandably, compliance checks can get missed, documents are filed incorrectly and approvals get stuck in bottlenecks due to busy workloads.

“Technology is helping these firms to solve their regulatory challenges through more robust compliance tracking, process automation and greater transparency, but they’re also benefiting from all of these gains while reducing the number of people it takes to achieve them. This means that wealth managers and other financial professionals can spend less time dealing with regulatory red tape and more time on fee-earning activity.”

How technology addresses these challenges

1. Investor profiling and deal suitability

Not all types of investors will be a suitable audience for a private markets proposition. Therefore, managing which of your clients has access to investment opportunities is crucial to the accurate and compliant distribution of deal information.

Embedding technology into your private markets proposition generates significant amounts of data across all aspects of the operation. Automating your processes and using data segmentation allows you to share the right deals with the right investors, at the right time.

2. Data and document management

The challenge of managing important data, information and documentation in a compliant manner isn’t a new one. However, the evolution of business practices, client engagement and digital adoption now means that data is more easily shared than ever before.

Greater reliance on digital tools to manage data and documentation sharing can actually offer new benefits. For example, digitising end-to-end processes offers firms the potential to create full audit logs at the click of a button, rather than needing to manually collate reams of information from various sources.

3. Cross-border promotion of investment opportunities

In an increasingly globalised sector, compliance with cross-border promotion of investment opportunities has become an even more complex and challenging requirement to meet.

The digitisation of operational processes and the automation of workflows based on specific criteria (including regulatory jurisdiction) will enable wealth managers to mitigate many of the most common cross-border risks at source.

4. Internal governance and approval processes

While alternative investments undoubtedly pose some unique governance issues for firms to overcome, robust frameworks and sound internal processes will all play an essential role in mitigating risk and improving operational efficiency.

With process automation, each operational stage and decision will be recorded for retrospective review, meaning there’s less reliance on human input and you can be sure every step of the process is followed.

5. Transparent regulatory reporting

Recording documentary evidence of all investment-related processes, decisions and approvals is essential in order to not only mitigate against risk but to demonstrate good governance in the event of a claim against the firm. This is all made easier through technology which automatically logs actions and outcomes.

You can explore a more detailed view of the regulatory challenges associated with private markets in our research report here

To see how Delio’s private markets technology helps financial institutions to mitigate regulatory risk, click the button below to book a demo.

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