UK FCA findings on consolidation in the financial advice and wealth management sector

The UK Financial Conduct Authority (FCA) has published its findings from a multi-firm review into consolidation trends within the financial advice and wealth management sector. The FCA has seen an increase in consolidation in the financial advice and wealth management sector through acquisitions in recent years. Therefore, to support sustainable growth in the sector, the FCA has reviewed a sample of groups which included acquiring independent financial advisers (IFAs) and established wealth management businesses, providing discretionary investment management and advice solutions to group clients. The review assesses how firms manage risks, debt, governance and integration during and after acquisitions, highlighting both good practices and areas of increased risk. The FCA has seen consolidation support efficiency and growth by pooling resources, expertise and infrastructure and enabling long-term innovation, stronger governance and enhanced financial resilience. However, it has also seen that if fast growth of these businesses is not managed effectively, it may create poor outcomes. These could include poor client service, failure of business continuity and disorderly failure.

The review highlights good practices including groups with a clear structure, strong governance and risk management processes, groups who ensure regulated entities are well resourced and resilient despite debt levels elsewhere in the group and groups considering risks across all entities, capturing capital and liquidity needs created by these risks. However, practices which could increase harm include: (i) groups which are not prudentially consolidated, which impairs the ability to assess and mitigate group-level risks; (ii) group debt arrangements that weaken the resilience of regulated entities, particularly where cash is transferred to unregulated parent companies or used to guarantee holding company debt, exposing them to the group's financial and operational risks; and (iii) groups failing to grow their compliance and governance infrastructure to keep pace with their rapid growth. The FCA sets out specific areas of good practice and areas for improvement, grouped under the headings of group debt management; group risk management; group structure and approach to consolidation; acquisition and integration approach; governance and resourcing; and conflicts management. While no new expectations are introduced, the findings are intended to help firms understand those that already exist. Firms may also want to consider whether their risk management and governance arrangements support resilient, well-managed growth in line with the consumer duty and in the best interest of market integrity.

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