• Financial Services
  • Intapp DealCloud

Why financial services firms need better risk management

According to Thomson Reuters Regulatory Intelligence’s Cost of Compliance Report, 73% of financial services compliance professionals expect an increase in regulatory activity in the near future. Indeed, the U.S. Department of Justice and U.S. Securities and Exchange Commission have publicly stated that private investment funds top their examination priorities.

Competitive dealmakers and their intermediaries know they must tighten their compliance practices and adhere to these new general counsel guidelines in accordance with their clients’ wishes. However, many dealmakers don’t know the reasons and benefits behind this increased scrutiny. As a result, it can be difficult to convince dealmaking teams to implement change — especially if things are running smoothly as is.

To help your firm better prepare for — and maybe even embrace — this increase in regulatory activity, we’ve put together a list of seven case-building arguments in favor of improving risk management.

Prevent investigations, charges, and fines

The most obvious and proven reason to prioritize better compliance regulations is that you’ll save your firm the expense of enforcement actions following a failed audit.

In 2022, the U.S. Securities and Exchange Commission fined organizations $6.4 billion in regulations damages. In one week alone, 16 prominent bulge-bracket investment banks were fined $1.8 billion for using personal apps to do deals. And this year is shaping up to be an even bigger year for compliance fines.

But it’s not just fines that your firm needs to worry about. You also need to consider legal expenses, and the time and costs involved in gathering documents, redirecting resources, and controlling your reputational damage.

To catch compliance issues early, before they become a problem, your firm should invest in a compliance regulatory system. Your stakeholders may initially be hesitant to invest money in a new solution — but just remind them of the all-too-likely future expenses and headaches the tool will help prevent.

Improve deal flow

Following reporting requirements and improving your compliance regulations can also enhance your firm’s reputation and, thus, profitability. That’s because the financial services industry is built on relationships and trust. If your firm has a compliance breach, you’ll lose the trust of both current and potential clients, causing deal flow to dry up.

Having a solid compliance record gives your firm a competitive advantage, as it indicates your firm’s commitment to ethics, integrity, and transparency. The more robust your compliance, the stronger your firm’s reputation, and the more deal flow you attract.

In an environment where velocity is paramount, firms with proactive compliance programs can transform the conflicts-of-interest phase of due diligence from a drawn-out investigation into a simple check. By identifying and mitigating potential conflicts in advance, the due diligence process can proceed smoothly and swiftly.

Additionally, an effective compliance program can facilitate cross-border deals. As firms with liquidity increasingly seek investment opportunities in foreign markets, understanding and complying with various international regulations is critical.

Firms with robust compliance frameworks are better positioned to navigate these diverse regulatory requirements, opening new avenues for deal flow. A strong compliance record can reassure foreign regulators, counterparties, and investors, helping to expedite cross-border transactions.

Improve limited partner and public transparency

Limited partners (LPs) are becoming increasingly discerning about where they place their investment funds. A 2021 Intertrust study found that 80% of investors demand disclosures about their asset management — meaning that transparency is now a necessity for firms, rather than a nice-to-have.

Traditionally, fund managers and their intermediaries could settle without litigation or admission of wrongdoing, allowing senior management at investment management firms to save face within private markets. Gurbir Grewal, who directs the Enforcement Division at the U.S. Securities and Exchange Commission, believes that this conventional approach will soon disappear.

“Admissions are an incredibly powerful accountability measure, and you should expect us to continue seeking admissions in similar cases,” Grewal told Barron’s.

In addition to prioritizing transparency and accountability, firms should also leverage robust compliance frameworks and sound risk management strategies. These best practices are attractive to LPs, giving them confidence that your firm takes its fiduciary duties seriously, runs its operations carefully and professionally, and will safeguard their investments against regulatory and reputational risks.

Protect your group from negligent or malevolent actions of others

Your firm’s reputation for integrity isn’t just based on its own actions — it also rests on the actions of your partners. In financial services, where complex deals involve multiple parties, your compliance is only as good as that of your least compliant partner.

Regulatory authorities often hold companies responsible for the actions of their third-party vendors, and noncompliance by these vendors can result in significant penalties for your firm. When you tighten your own compliance practices, you’ll be required to scrutinize your vendor partners even further to ensure that they’re adhering to all relevant rules and regulations.

This scrutiny isn’t just about ticking boxes — it’s about genuinely understanding your vendors’ operations and the potential compliance risks they might present. Assess their compliance culture, understand their procedures, stress test their cybersecurity measures, and ensure they meet regulatory expectations.

Strengthen and multiply relationships

Nearly three-quarters of dealmakers believe regulations will increase in coming months and years. More than half said this would mean more time spent liaising with financial regulators and exchanges.

Establishing and maintaining good relationships with regulators can be highly beneficial for you firm. Clients and investors typically prefer to work with firms with a reputation for responsible and ethic practices — so by demonstrating a commitment to regulatory compliance and market integrity, you can differentiate your firm from competitors and gain a meaningful competitive advantage. When firms can demonstrate robust, well-documented compliance efforts, every interaction can become a relationship-building experience.

Develop better dealmakers

A robust compliance framework isn’t just for the benefit of your chief compliance officer — it also fosters an environment that cultivates better dealmakers.

One of the essential qualities of a great dealmaker is sharp, analytical insight. Thorough compliance measures rely on rigorous risk assessment, regulatory interpretation, and due diligence — all of which hone your team’s analytical skills. By grappling with complex compliance requirements, dealmakers can sharpen their ability to scrutinize deals, identify potential pitfalls, and devise effective strategies.

A commitment to compliance also promotes ethical decision-making. It ensures that dealmakers are aware of the broader impacts of their decisions, including on your firm’s reputation and investors’ trust. This awareness can drive dealmakers to negotiate better deals that are both financially rewarding and aligned with your firm’s ethical standards and regulatory expectations.

Compliance is intrinsically a long-term play. It requires dealmakers to look beyond immediate gains in their portfolio companies and consider the long-term implications of their actions. Dealmakers who balance short-term wins with long-term objectives are more likely to secure deals delivering sustained value.

Finally, given the rapidly evolving regulatory landscape, a commitment to compliance fosters a culture of continuous learning. Dealmakers must stay abreast of the latest regulations, industry trends, and best practices. A habit of constant learning and adaptation will help develop more informed, agile dealmakers who are capable of navigating the ever-changing private equity landscape.

Commit to ethical practices

In an increasingly interconnected world, businesses have a responsibility to contribute positively to society. This includes adhering to compliance regulations.

Compliance is not just about following the letter of the law, but about acknowledging and fulfilling the spirit of these regulations: to create a fair, transparent, and sustainable financial ecosystem. Firms must ensure that their operations are fair to all stakeholders — from investors and partners to employees and the wider community.

By following the rules and regulations set by authorities, firms contribute to a functioning, stable, trustworthy financial system. When you invest in employee compliance regulatory solutions, you send a message to all stakeholders that your firm is trustworthy and committed to doing what’s right.

Streamline your compliance regulations with Intapp DealCloud

Enhancing compliance regulations is both a defensive strategy to prevent penalties and an offensive strategy to give your firm a competitive edge. By embedding compliance into your firm’s DNA, you create an environment that nurtures better dealmakers, ultimately driving superior deal outcomes.

It’s crucial for firms to understand the profound importance and multifaceted benefits of employee compliance regulatory solutions. With Intapp DealCloud, your firm can effectively fulfill its compliance commitments.

DealCloud’s employee compliance software empowers firms like yours to meet and exceed compliance standards. The platform offers an integrated approach to compliance, bringing together robust data management, actionable insights, and efficient workflows. This integration lets your firm maintain a real-time view of your compliance landscape and swiftly act on potential risks or issues.

With DealCloud, your team members can spend less time worrying about compliance and more time focusing on what they do best: closing deals and driving value. The platform fosters a proactive compliance culture, nurturing better dealmakers while ensuring that your firm upholds the highest ethical standards.

We encourage you to explore how Intapp DealCloud can transform your approach to compliance regulations at your firm. Together, we can build a more efficient, ethical, and prosperous future for all dealmakers.