The top five regulatory challenges facing Swiss wealth managers
As one of the world’s premier financial services hubs, Switzerland has an enviable reputation for the quality of its wealth management and private banking services. With a rich history for combining political stability with incredibly high levels of client privacy, Swiss wealth managers cater to the needs of some of the world’s wealthiest individuals. As a result, they are expected to deliver a breadth and depth of services that exceed the requirements of the most discerning of clients.
Naturally then, Swiss wealth managers have had to adapt to the strong and consistent demand from wealthy investors who want to deploy their capital to private markets. Since the turn of the century, the role of private markets in wealth management has transformed from a niche investment strategy to one of the most in-demand requirements of a balanced portfolio.
Demand for private markets forces a change in strategy
The rapidly increasing demand for access to private markets has meant that wealth managers have had to adapt their strategy and create access to unlisted investment opportunities. A failure to do so could potentially result in the loss of clients and assets under management to firms who can offer deal flow in asset classes that have seen an explosion in interest.
However, while this strategic shift offers financial institutions a new and exciting way to engage their wealthiest clients, it has created a new set of challenges for wealth managers. Firms are now having to rapidly adapt their governance processes to accommodate higher levels of activity in what is widely regarded as one of the most complex regulatory areas in financial services.
What is keeping Swiss wealth managers up at night?
Delio research conducted in 2021 highlighted that 82% of wealth managers saw regulatory compliance as a barrier to them offering more private markets solutions to their clients. However, 64% of wealth managers said that they do offer a private markets proposition to their clients. So while enabling client access to private markets undoubtedly comes with some hurdles, it appears that a growing number of wealth managers feel that this is an element of their proposition that simply cannot be overlooked.
So what regulatory matters are specifically causing concern for wealth managers? Based on the responses offered by wealth managers of varying sizes from across the world, these are the top five governance challenges facing wealth management firms in relation to private markets.
1. Cross-border promotion (64% of respondents rated it as a significant risk)
It is common for private markets investors to operate from several international locations. This is particularly pertinent for Swiss firms, whose clients are likely to be based across multiple global jurisdictions. In an increasingly globalised sector, compliance with cross-border promotion of investment opportunities has become an even more complex and challenging requirement to meet.
2. Managing data and documentation (50%)
Swiss financial institutions are globally renowned for their rigour around data security, with many commentators considering the country’s data protection legislation to be amongst the best in the world. However, the evolution of business practices, client engagement and digital adoption now means that data is more easily shared than ever before.
It is vital that wealth managers have appropriate procedures in place to ensure that data and documentation is managed appropriately. This includes considerations around general data security, accessibility and appropriateness, all of which can potentially create significant regulatory headaches for wealth management firms.
3. Investor suitability and appropriateness (50%)
The process of connecting clients with suitable investment opportunities has evolved significantly in the last decade, with numerous tools now available to support wealth managers in how they assess investor suitability. In private markets, this process has largely been undertaken through manual cross-matching of investor profiles and deal due diligence, but this approach is time consuming and highly susceptible to data inaccuracies and human error, creating the potential for significant regulatory risk.
4. Internal governance and approval processes (45%)
While alternative investments undoubtedly pose some unique governance issues for firms to overcome, robust internal processes will play a significant role in mitigating risk and improving operational efficiency. However, without some form of process automation this often becomes such a drain on their resources that processes end up being ignored or compromised in some way. Even if internal procedures are being followed to the letter, there is still a reliance on human inputs to expedite various steps which increases the chance or errors being made.
5. Reputational risk (45%)
Reputational damage caused by a regulatory failure is often flagged as one of the most difficult risks for wealth managers to overcome. While modest individual incidents can potentially be managed internally with little worse than a short-term loss of confidence with a specific client, more systemic failures will likely attract the attention of regulators and potentially find their way into the media. In simple terms, recording documentary evidence of all investment-related processes, decisions and approvals is essential to demonstrate good governance in the event of a claim against the firm.
The role of technology in mitigating risk
Wealth managers who use technology heavily to support the governance of their private markets offering, also appear to enjoy far greater confidence in their regulatory compliance. 9 out of 10 respondents who utilise digital compliance tools said that they felt that their private markets offering was governed ‘as well as or better than’ their traditional investment proposition. Compare this with wealth managers who were not using technology as part of their regulatory approach, and that number drops to just 6 out of 10.
The greater regulatory confidence offered by a digitally driven process does not surprise Gareth Lewis, chief executive of Delio. “I have 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.
These factors lead to gross operational inefficiencies and an erosion of confidence in their regulatory governance. 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.”