There is a lot of conversation about democratising private investing in the United Kingdom for affluent individuals, but what does this really mean, and what role does financial crime compliance play in this?
The United Kingdom (UK) is one of Europe’s leading destinations for venture capital, but in recent years, the market has experienced slowdown in private investment. Getting access to moving money is difficult, and high-level investors are at high risk, putting the industry in a chokehold. This is not unique to the UK; we see similar trends in Europe. In the UK’s case, the slowdown can be largely attributed to inflationary pressure and economic uncertainty, but more importantly the lack of democratisation of private investment and easy movement of funds.
To democratise private investment is to make investment opportunities easier to access to a wider range of investors, by lowering barriers to the private investment market. Effective sanctions screening keeps both sides of the investment safe, private equity firms can be assured that funds have legitimate origins, private investors face less friction, and the market gets the money it needs. In 2023 the private investment market in the UK fell by 22% compared to 2022, which brought the biggest fundraising drop since 2009 to the market. Additionally, total deal value and count in private equity also decreased sharply from their peaks in 2021 with deal count dropping by 35% and deal value falling by 60% on average.
The state of private investment in the UK today is currently mixed with some positive trends, this is mostly due to post-pandemic economic recovery and Brexit. The UK government employs a range of policies and incentives – from tax incentives such as the Enterprise Investment Scheme (EIS) to grants and funding such as the Innovate UK Grants – to support market growth.
Democratisation of private investment faces several challenges but could offer the private investment market the boost it needs.
What are the barriers to the democratisation of private investment?
- Manual financial crime controls
Regulations are designed to keep investors safe from fraud and risky investment, but high levels of friction in financial crime controls can also result in high barriers to entry. Staying compliant with regulations can be complex and costly. For example, The Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017, implements the EU’s Fourth Money Laundering Directive and covers provisions like Customer Due Diligence (CDD), Enhanced Due Diligence (EDD) and the demand for ongoing monitoring, reporting and record tracking. Manual compliance systems not only present major challenges to democratisation of investing, they add time consuming and costly barriers to those who wish to invest – unquestionably, sensible and appropriate automation would help to overcome this.
- Due diligence challenges
Private equity firms with effective due diligence and screening processes in place can be a positive intermediary between investors and companies seeking capital. This enables access to diversified opportunities with lower investment requirements and can reduce risk of illegitimate funds being used.
- Financial literacy
The accessibility of financial information can be a significant barrier to democratisation of private investment. Understanding of the risk and rewards of private investment can hinder investment opportunities.
How do we democratise private investment?
- Improve education around investment risk
By making investment more accessible and providing financial literacy tools for users, companies can encourage new investors and make them feel supported as they enter the market. Design partnerships with anti-money laundering (AML) software providers can help investment firms and platform providers to learn more about investment safety and protection to provide materials about investment safety for your customers. For example, Beinvest have created an extensive database of learning for investors to empower them on their journey and make investment more accessible.
- Enabling digital investment
By investing in digital accessibility including user interface you can attract new investor, for example HSBC have been successfully attracting new investors by improving their product mix and digital journey in an on the go app. More on, by utilising AI and automation in your workflows for compliance and AML controls to reduce the number of repetitive tasks for compliance teams and enhanced customer due-dilligence (CDD), they can focus on larger tasks. AI can also be used for support bots to cover generic frequently asked questions in real-time and improve customer experience.
The role of financial crime compliance software in democratising investing
By making private investment more accessible for those seeking to invest, as well as driving increased levels of transparency and controls for regulators, the result is affordable investing at a volume that will bolster the market. Many anti-money laundering controls are manual in this space, creating lengthy onboarding processes. Automating these processes can greatly reduce the barrier to entry. Financial crime compliance software is an important source of support on this journey for ensuring customer protection and regulatory compliance while growing investment.
This can work by:
- Lowering the barriers of accessibility: Keep your customers safe when onboarding but lower barriers to entry by automating onboarding and reporting, allowing you to be agile and supportive of customers during their onboarding period through to ongoing investment.
- Being ready to scale: Employ a solution that can scale with demand meaning you can readily support democratised investment.
- Ensuring a high level of customer experience: You can ensure customer experience by testing new rule sets in a sandbox without making untested changes to your live environment.
Democratising private investment holds significant potential for revitalising the UK’s private investment market by making investment opportunities more accessible to a broader audience, ultimately leading to increased market activity and growth. By leveraging financial crime compliance tools to lower barriers to entry while ensuring robust investor protection, the market can achieve a balance between accessibility and security, paving the way for a more inclusive and dynamic investment landscape.
FundsDLT addresses the growing demand for transparent and automated fund distribution. Learn how FundsDLT worked with Napier AI to bolster its blockchain technology to serve global asset managers, by automating and centralising the fund distribution onboarding process, increasing efficiency and reducing complexity when making customer due diligence checks on investors.
Photo by Nick Fewings on Unsplash
