Today, financial institutions must contend with the accelerated rise of the three ‘Cs’ – competition, compliance, and costs.
Fintechs – unencumbered by legacy thinking and fueled by tens of billions in venture capital funding – are looking to aggressively steal incumbents’ market share. Meanwhile, compliance costs have also been trending upward, placing further pressure on margins.
- From 2008 to 2017, compliance costs have jumped over 60% for retail and corporate banks
- Financial crime compliance costs for North America surged almost 20% in 2021 to nearly $50 billion
- A 2018 survey by the Risk Management Association revealed that half of midsize and large financial institutions spent between 6—10% of revenue on compliance (a figure likely to be higher now)
On top of all that, rising wages are likely to exacerbate compliance costs – particularly for firms who need to add headcount to manage higher deal volumes.
In such an environment, being able to scale while keeping a lid on compliance costs is crucial to maintain a competitive edge. But as compliance permeates almost every aspect of a financial institution’s operations – which can be highly diversified – there is no “one size fits all” solution.
Solving the Compliance Cost Conundrum in Private Capital Markets
The issue of managing compliance costs is a broad one. However, the solutions must be narrow. Compliance is an umbrella term covering multiple areas, meaning firms must drill down into the specific requirements of each area – and then seek out customized solutions that can help manage the costs in meeting these requirements.
Consider the private capital markets. Under FINRA regulations, US broker-dealers must abide by FINRA Rule 5122 or 5123, requiring them to file offering documents to FINRA’s corporate financing department. In Canada, regulations differ according to province – with some stricter than others.
And this doesn’t include the KYC aspect of compliance, including verifying the accredited status of potential investors. All these can create a significant drag on operations – or necessitate higher and more expensive headcount – when deal volume increases.
The good news is that conditions are ripe for private market deal volumes to continue to rise. The not-so-good news is that such rising deal volumes are likely to also result in an increase in compliance costs.
The Goal – Supporting Rising Deal Volumes Without a Proportional Increase in Compliance Costs
As we noted in our other post, friendly regulations are supportive of growing demand. There are increased offering sizes for Reg-A and Reg-D in the US, not to mention an expansion in the criteria of accredited investors. In Canada, the Ontario Securities Commission exempted conflict of interest disclosure requirements for private placements of foreign securities to institutional investors earlier this year.
Couple these with accommodative market conditions – including high liquidity and low borrowing costs – and the future of private placements is looking bright across the board.
However, if such increasing deal volumes necessitate a proportional increase in compliance costs, you won’t be able to fully capitalize on this opportunity. Remember, competition is only getting more intense. Not being able to scale your private placement volumes without adding substantial compliance headcount doesn’t just mean lower margins. It also likely means:
- A poorer experience on the part of investors. Hiring can take a lot of time, while deals can pour in much faster. This lag may result in an overworked compliance function, leading to operational delays and investor frustration. The winner? Your competition.
- An inflexible compliance cost structure. While we are seeing prime private placement conditions right now, there is no guarantee this will always be the case. Deal volumes will ebb and flow. If you add compliance headcount when deal volumes are high, it’s not so easy to let them go when volumes fall.
The Solution – A Technology Platform That Allows You to Flexibly Scale
At Katipult, our platform allows financial institutions to build in a flexible foundation for their private placements that allows them to scale without incurring commensurate increased compliance costs. Compliance is automatically built-in to every level of the deal process – not only resulting in cost savings, but also faster deal closures, greater transparency, and smoother audits.
How can we help you achieve this?
- Automated and personalized investor onboarding – including online accreditation, KYC, and AML. Onboard 100 new investors as quickly and easily as 10.
- Smart subscription agreements that dramatically boost “first time” accuracy and completion rates. Accelerate deal flows with fewer compliance flags and “not in good order” documents.
- Immediate visibility by the compliance team at every step. The moment a subscription agreement is signed, compliance teams are automatically notified. Subscription agreements are also more likely to pass compliance on the first try.
All of these are contained in a cutting-edge digital platform designed with every step of the private placements process in mind.
We’ve already given Tier-1 clients like Raymond James, Canaccord Genuity, TSX Trust Company, and Echelon Wealth Partners the ability to achieve compliance at scale in their private placements. We can do the same for you. Contact us to learn more.