Delio explores governance and risk management in Private Markets
Your business model and governance framework go hand-in-hand
One of the first things to keep in mind is that governance is not a stand-alone consideration. To create a robust governance framework that is fit for purpose, you need to integrate it with your wider operational processes and business model. In short, your private markets governance framework must operate in lockstep with your operating model.
We have seen how legislative changes or events like Covid-19 have forced financial firms to adapt their commercial and operational strategies. Yet, the knock-on effect that these changes can have on a firm’s governance framework is often overlooked. A lack of up-to-date procedures and training can leave financial firms’ propositions open to heightened risk. This is why the relationship between these three models must be clear from the outset and evolve together.
A key consideration: who is in your investor base?
It is essential to remember who your target investor audience is. After all, this can have regulatory and legal implications for your approach. For example, the residence of your target investors can affect your marketing activity and the standards that you must adhere to when interacting with investors.
Furthermore, not all types of investors will be a suitable audience for a private markets proposition. This is why the regulatory classification of the target investor should be determined at the outset and subsequently reviewed at periodic intervals. Consistency and detailed data are crucial, causing many financial institutions to turn to digital tools for support. Technology can help to establish and validate investor classification. It can also help assess the appropriateness of private market investments for the investor, storing all data in a centralised, secure location.
Brushing over investor appropriateness and suitability can lead to investor harm
For some time, suitability has rightly been a keen regulatory focus. As the FCA highlighted earlier in the year, financial advisors far too often do not adequately consider “the appropriateness of investment products for investors”.
To avoid such compliance issues, financial advisors need to keep the appropriateness of products in mind at all times. Here, digital tools like in-built compliance checks can help. By putting automatic ‘protective barriers’ in place, clients are prevented from committing to investment opportunities they do not fully comprehend or whose risk profile is inappropriate for them.
The challenges of cross-border marketing in a globalised world
Over the last twenty years, the investment landscape has benefited from globalisation. Yet, as more and more investors operate on a global scale, this has made the cross-border marketing regime a lot more complicated. Regulatory compliance and tax transparency are more challenging for a firm working across numerous regulatory and legislative landscapes. For such firms, adequate digital organisational controls can reduce the inherent risk of manual error.
Concrete documentation will help manage reputational risk
Despite a clear intent to do everything by the book, financial advisors need to factor in reputational risk – both in design as well as operations. From outlining conflicts of interest through to due diligence, the need for robust documentation is crucial. Since ‘risk’ is often subjective from a reputational point of view, organisations need to protect themselves and their clients by documenting why a decision has been reached.
At Delio, we have seen a massive change in how people are documenting their governance, thanks to automation. Technology has helped firms to develop consistent processes and create a governance framework that fulfils the regulators’ expectation.