The challenges of operating private markets cross border, but within local regulatory frameworks

The challenges of operating private markets cross border, but within local regulatory frameworks

7th July 2022

Cross-border operations have long been considered one of the most significant regulatory barriers for wealth managers to overcome. This is particularly true when it comes to private markets. Our research showed that 64% of wealth managers class it as a significant regulatory risk. As the world becomes increasingly globalised, this is a challenge that is only likely to become more prevalent.

Over the last decade, high-net-worth clients have become increasingly mobile, with many of them splitting their time across continents depending on their personal and professional interests. When coupled with the growing requirement for tax transparency, it is perhaps unsurprising that cross-border operations continue to cause regulatory headaches for wealth managers globally. 

In fact, some firms have decided that the best way to meet their regulatory requirements is to pull out of certain markets altogether. Given that this appears to be a problem that is unlikely to go away anytime soon, a more proactive approach to modernising their private markets operation appears to be the only long-term solution.

64% of wealth managers class cross-border promotions as a 'significant regulatory risk'

So what can firms do if they wish to keep operating on a global scale?

Several industry commentators believe that wealth managers’ operational models now need to be adapted in light of a more mobile client base. These include the ‘remote’ model, where a wealth manager operates from one central location as a permanent establishment, through to a ‘network’ model where separate legal entities are established in each jurisdiction. 

These models, and several variations in between, all offer various pros and cons; therefore, it’s most likely that wealth management firms will need to make these decisions based on their own strategic objectives and the demographic make-up of their client base.

Redefining their organisational structure is another option. Traditionally, wealth managers have been seen as ‘generalists’ operating across a specific geographical basis; however, with more of their clients likely to consume services from various locations, there is a school of thought that suggests wealth managers should instead focus on specific areas of expertise that they can translate across multiple regulatory jurisdictions.

Finally, the integration of service delivery with technology has been highlighted as playing a key role in how firms adapt to the challenges created by greater cross-border operations. 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. 

David Newman, chief commercial officer at Delio explains:

“The most innovative wealth managers have flipped the traditional approach to compliance on its head. They have accepted that robust regulatory governance is non-negotiable, so they have looked at how this can be turned into a commercial advantage. The digitisation of their regulatory operations is one way in which they can transform good governance from a drain on resources to a driver of operational efficiency and commercial growth.”

While the increasingly globalised nature of regulatory demands has created additional challenges that need to be overcome, it is important to remember that this legislation does have a vital role to play in protecting the interests of investors. Therefore, the use of digital tools to make this process more consistent, efficient and valuable is something that wealth managers cannot afford to ignore.

Download our regulatory governance report