Meeting The Post-transaction Regulatory Challenge

Malin Nilsson, Director at Duff & Phelps’ Kinetic Partners division  in the Channel Islands wrote this article for BL Magazine in which she explains how regulatory risks can be minimized following private equity investment, mergers and acquisitions.

Fiduciary firms, including many fund services providers (FSPs), have recently seen increasing levels of private equity (PE) investment and consolidation. Completing robust regulatory due diligence prior to a transaction is key to identifying potential weaknesses within the target, but the challenges following a transaction are often not as widely reported on. These challenges may have a negative impact on the success of the firm, unless they are effectively identified, managed and implemented. Here we address the key regulatory risk areas that firms typically face post-transaction, and the practical considerations for firms to achieve the intended commercial returns.

1. Post-transaction plan

The lead-up to any transaction can be intense and establishing a post-transaction plan may not seem a priority at the time. But it is key to establishing confidence that the new firm will be able to deliver on the objectives of the transaction. Key areas for consideration:

  • Has the plan been broken down into different functional areas, such as IT, HR and compliance, all of which will have complex inter-dependencies?
  • Has the compliance plan evaluated and incorporated regulatory risks identified in due diligence reviews, with realistic timeframes, costs and resources allocated?
  • Have the timings for post-transaction regulatory approvals been considered? In some instances, this can take as long as nine months.

2. Roles and responsibilities

Without establishing governance, reporting and decision-making structures, it’s difficult to implement the post-transaction plan. Key areas for consideration:

  • Prior to the transaction, has a governance model been established for the target firm and ‘who will be doing what’? For example, who will form part of the new executive board, management team and integration steering committee;
    which key individuals will hold senior positions; and who will manage regulatory risks?
  • Has each office location been taken into account, especially who in each office will form part of the compliance function? If there are vacancies, these need to be included in the post-transaction plan.
  • How will the compliance culture be driven from the top and cascaded through the firm? This is particularly important when two businesses merge and a new board is established.

3. Retaining employees

An FSP’s success relies on its employees. Any period of change can result in an unsettled and distracted workforce. This may in turn affect employees’ decisions and behaviors, as well as creating controls gaps in regulatory monitoring activities, which may lead to regulatory breaches and commercial risk. Staff turnover in the compliance team can be particularly disruptive. Key areas for consideration:

  • Have communications plans been created that outline the transaction’s key messages, including the new vision, impending changes and benefits? A timely communication plan (through line managers, senior management and compliance function) is key to gaining employee engagement and buy-in, and a positive perception of the transaction.
  • Have due diligence reviews and non-disclosure agreements been considered and positioned internally? Ensuring that there are no information ‘leakages’ is particularly challenging in small jurisdictions.

4. The regulatory risks of technology and operations

While we focus here on regulatory risks, the dependencies that exist between regulatory, IT and operational aspects are many. A careful assessment of dependencies must be undertaken to lay the foundations for an effective compliance infrastructure. Key areas for consideration:

  • Have common operational and IT platforms between both the purchaser and the acquired business been considered? Client database systems may need to be integrated – for instance, those that hold customer due diligence and client data for meeting regulatory reporting requirements.
  • Has a carefully planned IT integration or migration plan been established?
  • Has training on new IT and operational procedures been scheduled?

Managing regulatory risks from the outset is paramount to unlocking the value from the transaction, as well as maximizing efficiencies in the future. The period after a transaction is an opportunity to reduce regulatory risks, implement compliance improvements, drive a compliance culture from the top and develop control frameworks that will see the new firm through its future growth plans.

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