Turning compliance into a commercial advantage through technology

Following the global financial crisis of 2008, industry commentators and politicians alike realised that a global regulatory overhaul was required – and private markets compliance was no exception. From greater senior management accountability to reducing the risk of inappropriate investments and conflicts of interests, financial institutions have taken steps to ensure that their regulatory governance strategies become more robust, transparent and accountable. So much so that by 2018, regulation had become ‘one of the fastest-growing activities in the US and the UK’. But this trend hasn’t come cheap:

• The cost of compliance is rated as the biggest challenge facing 1 in 5 wealth managers.
• The challenge is how to adapt their regulatory operations while maximising efficiency.
• In 2021, nearly 1 in 3 institutions believe the cost of compliance will be more than 5% of their revenues, while only 12% think it will be below 1%.

Is moving out of specific markets a solution?

To combat the escalating cost of their regulatory commitments, some financial institutions have taken the fairly blunt approach of turning their back on certain markets or activities. For some firms, this included alternative investments, which are often at a higher risk of significant loss of value and a higher burden of regulatory proof. 

Yet, with investor demand for private markets accelerating consistently over the last decade, is this a sustainable commercial decision? By simply closing the door to private markets, financial institutions risk missing out on new commercial opportunities that have significant appeal to today’s investors as well as the next generation of wealthy clients. In short, wealth managers will increase the chance of losing clients by not meeting their investing needs. Instead, they need to find more operationally efficient ways of meeting their private markets’ compliance obligations while satisfying client demand. One of the solutions could be through the better use of technology.

Turning to technology

Digitisation has transformed how many wealth managers interact with their clients, with many moving from purely in-person engagement to a ‘hybrid’ model that could also involve digital channels and messaging apps. As a result, firms have had to broaden their governance processes in line with their digital strategy. 

However, technology can also enhance how these regulatory obligations are managed, tracked and acted upon while creating previously inaccessible insights that can be used to improve client engagement, improve operational efficiency and strengthen regulatory processes. 

The most innovative wealth managers have accepted that robust regulatory governance is non-negotiable, so they have looked at how this can be turned into a commercial advantage.

So, how are firms adapting their regulatory strategy to incorporate greater use of technology, and what are the main benefits? 

Digitisation can free up resources

The adoption of fintech and regtech services has helped institutions to save time and improve operational efficiency. Rather than investing heavily on resources and people to manage private markets’ compliance processes, these can now be automated through digital tools that can be configured around the organisation’s needs. This approach enables financial institutions to reclaim hours of employee time each week that can be spent serving their clients and enhancing their propositions.

Limiting the risk of human errors

As well as saving time, automated processes guarantee consistency. They ensure that proper controls are in place, approval processes are followed accurately, and the risk of exposing investors to inappropriate opportunities is significantly reduced. For example, a digitised workflow could ensure that no investment opportunity is ever promoted to potential investors until a series of essential pre-checks have been completed, approved and recorded for audit purposes. 

Controlling client access to private market opportunities

Access to alternative investments and private markets is generally limited to a specific segment of a wealth manager’s clients based on their regulatory profile. Therefore, ensuring clients can only access investment opportunities based on specific criteria is a vital regulatory objective. Rather than relying on manual suitability checks carried out by their relationship manager, pre-determined classifications of both investors and deals can ensure that the risk of a client being exposed to an unsuitable opportunity is greatly reduced. This improves regulatory governance and helps wealth managers focus their commercial efforts only on the clients who are in a position to invest in the opportunity.

The rising role of data

Digitisation offers wealth managers the opportunity to gather previously inaccessible insights that enable them to understand their clients better. For example, real-time analytics on deal engagement and transaction management can help relationship managers to target investor engagement more accurately, understand clients’ investment priorities, and uncover trends regarding which types of opportunities gain more traction.

With the sophistication of digital tools increasing rapidly, it is fair to say that the ability of compliance functions to generate valuable commercial insights will only gain further momentum in the future.