How technology could be the solution to the FCA’s intensifying scrutiny of private markets

How technology could be the solution to the FCA’s intensifying scrutiny of private markets

15th August 2022

The FCA recently distributed a letter to fund managers of alternative assets, warning that regulatory scrutiny is intensifying in two key areas; process management and investor profiling. 

These ‘crack-down’ measures from the FCA shouldn’t come as a surprise, given the increased number of fund managers now operating in the alternative assets market. Over the last decade, demand for private markets has sky-rocketed, with fund managers having to scale their offering accordingly. With this kind of growth, greater scrutiny of regulatory processes is inevitable, presenting an inherent challenge to firms that are active in these markets.

In their letter, the FCA encouraged firms to ensure that their regulatory processes are robustly structured and that the suitability of their investment offerings are appropriate to each individual client. With such a clear warning from the regulator, we take a look at how the efficient use of technology will play a pivotal role in ensuring firms can satisfy their desire for greater regulatory scrutiny.

How can technology solve firms’ regulatory challenge?

Fund managers have historically relied on manual, human-led processes to distribute investment opportunities to their clients and manage their regulatory obligations. Those firms that are still utilising this traditional approach are not only at risk of losing clients to their more innovative counterparts, but are also in jeopardy of regulatory action should their operational processes not stand up to scrutiny. 

Delio’s co-founder and chief commercial officer, David Newman explained;

“The traditional approach to distributing investment opportunities to clients left a lot of potential gaps in firms’ compliance processes. This created ‘regulatory black holes’ that they would struggle to document from an audit perspective. In fact, the amount of paperwork involved with the investment process meant that, in some cases, shortcuts were much more likely to have been taken.”  

Digitisation of these processes could be the most effective solution for fund managers, and other financial institutions, that need to strengthen their regulatory approach to private markets. The days of searching through paper-work piled high on desks are numbered; a digital solution offers a more efficient, robust and transparent approach for firms, their investors and the regulator. 

Working smarter, not harder

Technology such as Delio’s private markets platform is designed to digitise regulatory processes, reducing the ability of staff to bypass compliance processes either deliberately or accidentally. Workflow automation guarantees that investment-related documents, information and tasks must be performed in line with pre-agreed operational processes, and therefore crucially comply with an organisations’ approved governance framework. Alongside this, each task and activity is automatically logged, providing trackable insight into how opportunities have been managed at each stage of the investment lifecycle.

The use of digitised client profiling and segmentation ensures that firms have complete control over what opportunities are presented to potential investors based on their regulatory profile. This not only mitigates risk, but also enhances the client experience by personalising the service they receive. 

David Newman added;

Now, firms are increasingly using digital platforms to connect their clients with investment opportunities; this makes it much easier to ensure that the right deals are offered to the right investors, significantly reducing the possibility of mis-selling.”

“We would prefer that no company was found wanting in this area, as it could not just have a major impact on investors, but could also reduce confidence in any firm operating in the private markets space. So, all firms have a responsibility to ensure that their regulatory governance is robust, otherwise everyone potentially loses.”

This warning by the FCA is likely to be the first of many. If private markets continue to out-perform their public counterparts as they have done over the last decade, investor appetite for holding alternative assets will continue to grow. Intensifying external scrutiny of regulatory processes is likely to follow this trend. Technology will be key to finding an effective solution to this challenge, and fund managers should look to adapt now, before they get left behind. 

For more information on how Delio’s private markets technology helps financial institutions to meet their regulatory challenges, visit our website or get in touch with our team.

Regulatory Governance in Private Markets report