Conflicts of Interest in Investment Banking: 3 Ways to Manage Risk with Software

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Leading global investment banking firms, in an effort to manage conflicts of interest, have established countless firm-wide policies and procedures. While each firm has its own unique methods for preventing conflicts from arising, most firms share the central goal of effectively managing client relationships whilst keeping its people and transactions far from regulatory investigation or public relations scrutiny.

Whether real or perceived, conflicts of interest do arise in advisory work and also in capital markets transactions. These Conflicts can be between different clients of the Investment banks, between the Bank and its client and also between particular bankers. It is possible to have all 3 in large and complex transactions. Despite the push to regulate the investment banking industry at large, conflicts of interest do not always become apparent to a firm until a transaction is well under way.

More than ever, these firms are capable of checking for conflicts and do so regularly, but the process is pain-staking, inefficient, and time-intensive. Despite technological innovation in the industry, investment banks – especially mid-size firms with limited resources and smaller staff – struggle to establish and maintain an effective and consistent approach towards managing their Conflicts of Interest. As a result, they are often reactive in their Conflicts management, using significant management resources to solve problems and undergoing scrutiny from internal auditors and regulators.

In this article, we will explore three of the ways purpose-built software solutions can automate and accelerate the conflict-checking process at investment banks. Whether you’re seeking to improve deal conflict identification, review, clearance, or reporting, there are many advantages to leveraging software for conflict management.

Investment banking software centralizes data and systems

How do investment banking firms manage conflicts of interest when their data is housed in several disparate and disconnected places? The answer to that question is: manually, and with a great deal of effort. In fact, it’s not uncommon for Conflicts team members to perform manual searches and deep database scrubs for information. Conversely, software built to improve the conflict management process at investment banks centralizes the firm’s data, negating the need to search endlessly in Excel for knowledge about a deal or entity.

With software that centralizes data, Conflicts Team Members can better understand ownership structures and transaction complexity. By giving the Conflicts Team the ability to perform comprehensive searches of NDAs, MNPI logs, relationship hierarchies, and other key deal-related data, software accelerates the conflict checking process meaningfully.

 

“As profit-maximizing entities, banks have their own reasons to exercise control over conflict-of interest matters. If clients lose faith in their ability to get a fair deal at the bank, business will founder. Senior management will therefore put in place mechanisms to temper these conflict concerns.”

Erik Sirri,
as written in
Investment Banks, Scope, and Unavoidable Conflicts of Interest 

Investment banking software reduces organizational complexity

Since every transaction an investment bank participates in is unique, the bulk of the conflict management process, especially with approvals typically takes place over email. As you can imagine, this back-and-forth process is tedious for the bankers, Conflicts team and management and often delays or stalls the entire transaction.

Software built to improve the conflict management process at investment banks provides greater transparency into the firm’s dependencies, securities, and positions. In fact, leading software providers to the investment banking industry offer monitoring tools that reduce the administrative load associated with checking for conflicts by half or more.

Investment banking software mitigates regulatory and reputational risk

Undoubtedly, regulatory norms place the burden on investment banking firms to prove that no conflicts of interest exist in their deals. Furthermore, investment banks are tasked with proving that they have a systematic way to check and clear conflicts in every single transaction, no matter the size.

Federal securities laws require that investment banking firms regularly disclose certain facts and relationships that could be (or could be perceived as) potential conflicts of interest. But without software to accelerate and manage that process, the firm puts its own reputation at risk.

Conclusion

As the pace of digitalization across the investment banking landscape accelerates, firms are wise to consider their conflict management process as an area of the business to be improved by technology. If your firm is seeking to improve the way it identifies, reviews, clears, and reports on conflicts, schedule a demo of the DealCloud Conflicts product today.

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Author:

Nigel Riley

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