Whilst the regulator has said it is agnostic about PE and can see the potential benefits of consolidation, it would be foolish to think the review team has not set its sights on some key issues in the market. Following the 'light touch' feedback from the FCA's (delayed) ongoing advice services review in February, wealth management consolidators could still be in for a rough ride through 2025.
The review
The firms selected had to provide the FCA with a first tranche of information by 7 May. This included an up-to-date group structure chart from firms, encompassing all legal entities and their voting rights, including overseas holding companies, and the most recent audited annual accounts and all board members of each entity. The FCA plans a series of meetings and additional IRs to complete its work.
The prudential focus will scrutinise group structures and debt, compliance with MIFIDPRU consolidation requirements, assessment of group risk in ICARAs, and wind down planning (WDP).
Meanwhile, the conduct review will delve into acquisition targets, the structure of sales and purchases (including consideration paid), vertical integration and conflicts, management structures, and the adequacy of group resources in risk and compliance, ensuring they are sufficient for the group's size and growth plans.
Noteworthy items requested in the IR included:
- The most recent ICARA document(s);
- An overview of the group capital structure, where debt sits (including offshore), the amounts, and any guarantees or material covenants. Plus details of the rights and obligations of any preference shares;
- High level overviews of the groups:
- acquisition strategy
- integration strategy, including client and staff transfers
- funding of previous acquisitions and plans to fund future acquisitions
- interdependencies,including shared functions or key systems
- Consumer Duty Target Market and Fair Value Assessments for products and services manufactured (or comanufactured).
The issues
The FCA's plans were initially outlined in the portfolio strategy letter dated 7 October 2024, which highlighted the intention to undertake multifirm work to review consolidation within the market.
Within this, the FCA listed five priority expectations for firms:
- Notify the FCA and seek approval to acquire or increase control. Firms will need to ensure that they are meeting the FCA’s expectations of firms selling client banks, as detailed in the FCA’s December 2023 statement. (The publication of these expectations coincided with numerous requests for Deed Polls; which faced almost unanimous resistance, resulting in the FCA seemingly abandoning this approach).
- Ensure good outcomes, culture, leadership, governance, and oversight, with controls commensurate with the firms' growing size and complexity. The FCA's guidance for fast growing
firms (FGFs), which was aimed (in part) at wealth managers, is particularly relevant here. - Adequate due diligence on the selling firm or client bank. Firms should review their documented acquisition strategy, M&A policy, and procedures, including decision making processes and communication plans. It is worthwhile reviewing the due diligence process for acquisitions, including inputs from the various advisers and how this is coordinated, with the findings used for posttransaction integration.
- Firms must take into account the FCA's supervision review report from 2017 on acquiring clients from other firms (which first referenced ongoing adviser charge fee refunds where service integration fails), and the finalised guidance from 2012 on ‘assessing suitability: replacement business and centralised investment propositions’.
- For acquisitions funded by debt, firms should have a credible plan to service the debt, supported by realistic and stress tested financial projections. Investment firm groups must also fully comply with prudential consolidation rules. (The letter links to the FCA's IFPR newsletter. Firms will therefore need to consider their prudential position and PE structure / funding.)
In his speech at the time, Nick Hulme (Head of Department of Advisers, Wealth and Pensions, who is leading the consolidation review) said that, notwithstanding the benefits it can provide, the FCA is agnostic as to whether consolidation is a good or bad thing. However, he said a review was warranted given that 48% of advisers had reportedly been approached by consolidation firms in the past year. Hulme highlighted the need for a review due to observations from FCA supervisory visits that were not always satisfactory.
The FCA's consolidation review team was set to be led by one of the authors of the 2017 supervision review report (referred to above) which was conducted because "acquisition activity in the investment advice market [had] increased since the introduction of the Retail Distribution Review (RDR) in December 2012".
Centralisation and vertical integration, professionalisation, digitisation –and consolidation were all intended (or, at least, natural) consequences of the RDR and now, over a decade later, the FCA needs persuading this is all to the benefit of consumer investors, particularly since the introduction of the Consumer Duty in 2023. RDR replaced (conflict risky) commissions with adviser charges; agreed by the client, but facilitated by platforms and product providers.
Last year's ongoing advice services review was, in part, about ensuring firms were providing the advice promised and not simply replicating the old commission model by taking ongoing payments for little or no ongoing service. Vertical integration and advice groups including discretionary and/or platform services create new sources of fees – and potential conflicts. We expect the FCA review team already know what they’re looking for…
From a prudential perspective, there has also been a concerted focus post implementation of IFPR in January 2022. In particular, we have seen various prudential initiatives aimed at groups, including: the FCA's 2023 observations on the implementation of IFPR, focusing on a number of group related matters, and FG24/5 on the prudential assessment of acquisitions and increases in control.
Whilst we note that the FCA will have approved these group structures via the change in control process historically, the most recent regulatory publications make clear the intended direction of travel. It is worth noting that all of the s166s we have been involved in have had aspects of group prudential matters, whether in relation to the scope of prudential consolidation or group vs. consolidated ICARA process, as well as from a wind down planning perspective.
Our clients' and contacts' supervisory engagements with the FCA over recent months have revealed several key themes, including:
- meetings with the consolidation review team focusing on M&A strategy and process;
- challenges related to contingent deferred consideration, inducements and conflicts management, with some examples of M&A deal structures reported in the trade press;
- increased scrutiny of PE fund and corporate structures, debt funding (including with an offshore focus), prudential regulation / consolidation, and change in control applications;
- interest in firms’ use of trading styles; and
- numerous s166 Skilled Persons' reports addressing financial resources, financial crime, suitability, risk management frameworks, second line resourcing and the Consumer Duty
We recommend all advice groups (particularly the PE backed consolidators) proactively address the potential issues arising from the FCA's review. Whilst we hope the change in political wind direction will enable firms to sail through this review, there are obvious areas of choppy waters to navigate.
