Regulatory due diligence and the future of wealth management consolidators

The past decade has seen the wealth management and financial advice sectors undergo substantial change with the continuing merger and acquisition activity, consolidating small and regional firms into larger entities. So, what does this mean for the future of consolidators, and what challenges might be around the corner?

Since 2022, over 40 firms have spent more than £2.9bn acquiring businesses to build critical mass. While the volume of transactions has been lower in the last couple of years, we expect to see continued acquisition activity in these sectors.

The FCA has shown increased interest in this activity, issuing a data and documentation request to 40 of the most active consolidators. This included a request for them to provide their ICARAs for review, signalling the regulator’s interest in capital adequacy and risks.

Key drivers of consolidation in the wealth management and advice sector

Increased regulation in the sector has made life more challenging for smaller, directly authorised businesses.

The wealth and investment market has seen a lot of FCA scrutiny, increasing the regulatory burden. Selling their business allows the owner to transfer risk to the new owner.

The ageing profile of advisers has also contributed to the level of activity. Many firms were established and grown by individuals who have been approaching the time of life where the opportunity to exit has been attractive.

However, a key driver, and facilitator, has also been the availability of private equity money:

• Private equity houses identified the opportunity to access a growing advice market, at a time when business owners were ready to sell.
• They’ve seen the opportunity to bring firms together to benefit from scale, efficiencies, standardised advice processes, and solutions. In some instances, they’ve also seen opportunities to direct assets to platforms and investment management solutions within the group.

How regulatory due diligence expectations have changed

The quality and depth of due diligence requested by acquirers has reduced over time, and with this, an increase in the risks they have taken on. The FCA’s review of consolidators, and its increased use of s166 skilled persons reports in recent times, are likely to prompt acquirers to return to more comprehensive due diligence.

Some acquirers have seen the firms they have purchased be subject to remediation exercises for historic advice. Such exercises are costly, time consuming, and divert management from growing the business and generating returns for their investors.

For a number of years, we’ve been advising acquirers that the historic delivery of ongoing advice services is key to ongoing profitability and sustainability of a business and likely to come under regulatory scrutiny. We’ve now seen this become reality, with firms being required to review the delivery of their ongoing services back to 2018.

Defined benefit transfer remediation exercises continue, and the FCA has now produced its IAAT to sit alongside its suite of other suitability assessment tools, the RIAAT and DBAAT.

Acquirers have begun to change the profile of firm they’re willing to purchase, as they’ve become more discerning, and cognisant of the known and potential risks.

What’s next for wealth management consolidators?

We expect merger and acquisition activity to continue and could see an amalgamation of the consolidators as private equity seeks to exit its investments, realising its gains.

We’ll shortly see the FCA’s output of its review of consolidators. Whilst the FCA remains focussed on improving customer outcomes in the financial advice sector, we can see some signs of it turning the dial down on its supervision activity due to the growth agenda. It will still act against bad actors, however firms that present themselves as well run, with simple business models, will receive less attention.

Well-governed firms with clean and simple business models should continue to be attractive purchases.

Key considerations for firms acquiring regulated businesses

Acquirers should start with the end in mind when planning their acquisition strategy:

• What business model are you looking to build, and will the target firm fit well with this?
• What level of risks are you willing to accept, and more importantly, where are your red lines?
• What are the prudential considerations and what will the impact of acquiring new entities be on regulatory capital?
• What will successful integration of the businesses look like, and how will this be achieved?

How Ocorian supports regulatory due diligence for acquisitions

Ocorian has advised acquirers on some of the largest deals in the last five years and continues to support a range of consolidators as they integrate.

If you’re looking to acquire a regulated business, our regulatory acquisition due diligence service can be tailored to meet your needs. You can select the full service or, if you’re comfortable completing some elements yourself, you can just select the areas you require assistance with.

Our team will undertake an initial ‘red flag’ analysis, looking at historic advice, professional indemnity insurance, and a suitability review using a sample of higher-risk advice such as Defined Benefit transfers.

If you want to discuss your acquisition strategy, or the due diligence you might need, get in touch.

Author: James Marshall