Wealth management consolidators advised to review practices

Elizabeth Budd of Pinsent Masons, a specialist in financial services regulation, was commenting after the FCA raised concern that the “fast growth” of consolidators in the UK financial advice and wealth management sector could result in “poor client service, failure of business continuity and disorderly failure” if risks are not managed properly.

Consolidators in financial services are businesses whose primary route to growth is through acquisition. Consolidators, whose capital to scale often comes from private equity investors, have been very active in the financial advice and wealth management sector in recent years.

In a sample review, the FCA found that consolidators “play a significant role in this sector, including supporting retiring financial advisers who want to ensure their clients continue to benefit from receiving financial advice”. However, while it said it wants to “support consolidators to invest and innovate in this sector to provide their clients with good outcomes on a long-term and stable basis”, some practices – including around consolidators’ structure, financing arrangements, risk management, governance and resourcing, and management of conflicts of interest – can be improved.

For example, the FCA flagged concerns around group debt management, including over short-term borrowing and potential exposure to group-wide operational and credit risks. It also said some consolidators may be overvaluing goodwill on their balance sheets and using structures that undermine the financial resilience of regulated entities within the group.

Another area of focus of the regulatory review was on consolidators’ approach to acquisition and the way they integrate new business. In this regard, the FCA praised groups that undertake “rigorous due diligence” and operate “clear and disciplined integration plans, with well-resourced teams monitoring integration and client outcomes” and added that those with “a clear acquisition strategy, including defined commercial, cultural and client acquisition targets” are more likely to achieve good outcomes. However, it said others need to improve their “due diligence, monitoring and resourcing of the process” and risk and compliance frameworks.

The regulator called on consolidators to check their arrangements don’t present “increased prudential and conduct risks”.

Budd said the review could have an impact on how deals are done in future.

“In any acquisition, the integration of a new company or business in a group is vital for long term success,” Budd said. “That integration work starts with the due diligence on the target identifying the strengths and weaknesses of the target. The economics of consolidations often means that a deep dive is simply not viable and the acquirer is simply looking for red flag issues. However, an accumulation of amber flags can soon turn red.”

“This review confirms what we have been seeing in our work with accumulators where the FCA has taken an increasing interest in how the deal is to be financed and how the money flows will operate after completion. This is not new – but it is a clear warning from the FCA that it expects to see the areas of concern properly addressed,” she said.

Rob Cunningham, a specialist in private equity acquisitions who has advised on many consolidator transactions, said the regulator had acknowledged the many benefits of consolidation – such as improved efficiency, succession planning and continuity of advice – and made clear that growth must be matched by governance. 

“Private equity-backed transactions, in particular, will face heightened oversight, with the FCA now expecting institutional-grade governance, robust risk management, and demonstrable consumer duty compliance,” said Cunningham. “Although the findings reflect existing best practice already adopted by many consolidators, we should anticipate continued scrutiny of capital and funding structures as well as governance arrangements. Firms would be well-advised to take account of the key review findings when preparing and presenting change in control applications to avoid further questions and delays.”