Can brokers enjoy the benefit of diversification, without increasing compliance risk?

Can brokers enjoy the benefit of diversification, without increasing compliance risk

Recurring bouts of volatility over the course of the Covid-19 pandemic have been a boon to a number of brokers, driving up trading activity, and with it revenue from traditional broking activities. However, despite this short term boost, many brokers are now back to facing a familiar problem – increasing automation, and ongoing margin pressure, mean that revenues from traditional broking activities are under threat.

With this in mind, a trend is growing in the market – brokers diversifying revenues streams, and looking to enter higher margin businesses. This can take many forms, from soliciting new client groups, expanding the range of instruments for which brokerage is provided, or entering new segments such as research, underwriting and placing. Indeed, ECM and DCM are a particular area of focus, as capital raising activity has intensified as corporations try to weather the pandemic. Some firms are attempting to grow organically into new niches, while others look for M&A opportunities.

However, pursuing diversification brings with it new compliance risks. New conflicts may arise, new market abuse risks may become relevant, and some activities will need their own bespoke controls and monitoring. In addition, regularly applications will often be required, which are currently moving slowly in markets such as the UK, with increased application activity faced by the FCA driven by Brexit and cryptocurrency registrations.

Before pressing ahead, firms should consider the broader implications of their plans, including capital and resourcing, and develop a realistic timeline to implementation. Plans which haven’t been fully thought through and costed are less likely to pass muster with the regulator, leading to additional delays.

How Bovill can help

Bovill have a strong track record of assisting firms in developing their business plans, in a compliant manner. We regularly help firms to:

  • Assess the new permissions required for proposed business lines
  • Processing variations of permissions for new activities
  • Assessing new compliance risks, such as conflicts and market abuse
  • Building bespoke compliance frameworks for new activities
  • Performing regulatory due diligence on acquisition targets
  • Overseeing change in controls applications

If diversification is part of your business plan, get in touch to see how we can help.

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