FCA warns industry consolidation can cause ‘harm’

The FCA has warned that the rapid consolidation of the wealth management and financial advice sectors could be leading to ‘poor outcomes for consumers, employees and the wider financial system.’

In a major review of consolidation in the financial advice and wealth management sectors published today, the regulator says consolidation can support “efficiency and sustainable growth” but, if not managed effectively, can be a cause of harm.

The Financial Planning and wealth management sectors have seen a huge wave of M&A activity and consolidation in recent years, much of it driven by an influx of millions in private equity investment.

The FCA review focused on groups acquiring financial advisers and wealth management firms. The watchdog said the review examined how groups manage risks, debt, governance and integration during and after acquisitions.

The FCA said today: “The review found consolidation can support efficiency and sustainable growth. But, if not effectively managed, consolidation could lead to poor outcomes for consumers, employees and the wider financial system.

“Good practice identified in the review included clear group structures, strong governance, effective monitoring of group debt and comprehensive risk management across all entities. Firms that demonstrated well-planned acquisition strategies and thorough integration planning were also more likely to deliver positive outcomes for customers.”

The review highlighted areas with “greater potential for harm” and these included how groups were structured and how group debt was guaranteed. In addition, the review highlighted the importance of the effective management of group-wide risks and due diligence in the acquisition process.

The FCA added: “We encourage firms to consider the findings of the review, assess their own arrangements and make any needed adjustments to their structures and processes.”

According to the report, among the practices that can cause harm are:

• Groups which are not prudentially consolidated. This can lead to a difficulty recognising, measuring or mitigating group risk. This may also limit regulatory oversight of group debt, goodwill and associated risks.
• Group debt arrangements weakening the resilience of regulated entities. This includes regulated entities transferring cash to unregulated parent companies (upstreaming) via intra-group loans or guaranteeing the holding company’s debt, exposing them to the group’s financial and operational risks.
• Groups failing to grow their compliance and governance infrastructure to keep pace with their rapid growth

Good practices include:

• Groups with a clear structure, strong governance and risk management processes are likely better placed to achieve sustainable growth and deliver good outcomes for clients, staff and shareholders.
• Groups ensuring regulated entities were well resourced and resilient despite debt levels elsewhere in the group.
• Groups considering risks across all entities, capturing capital and liquidity needs created by these risks.

• This is a developing story – please check back for update.

• Multi-firm review.