It has been a while since the Financial Conduct Authority last talked in depth about consolidation, but its recent 'Dear CEO' letter means that this activity is once again in its sights.
Earlier this month the FCA announced its plan to carry out a multi-firm review of consolidation within the market. The FCA also sent a strong signal about how seriously it intends to take any rule-breaking.
Over the past two years there has been an increase in the acquisition of firms or their assets, while the world of advice has gotten more complex.
And while scaling up a business by making acquisitions might be an attractive proposition because of the efficiencies it brings, the FCA is concerned it may not always be good for the customer.
Chris McCullam, investments director at Altus Consulting, recollects that for some of the advisers he has worked with who have sold up and retired, only 40 per cent of their previous customers were retained by the consolidator.
“And even with those that are left behind, there are stories of those needing active advice support being left unattended, likely leading to poor customer outcomes,” McCullam adds. “Scale may be what industry wants but it isn’t always what the customer needs.”
The FCA has said where it receives notifications from individuals or firms to acquire or increase control in regulated firms, it will assess and challenge their suitability and the financial soundness of the acquisition.
As McCullam explains, currently the regulator requires firms to submit a regulatory business plan when they are seeking new or additional permissions, so a similar approach could be used for a material change in ownership or control.
The regulatory business plan already includes sections on business model, governance, and capitalisation, which would contribute to an assessment of suitability and financial soundness.
Roderic Rennison, a partner at M&A firm Catalyst Partners, says: “The FCA is likely to develop a standard set of questions to ask acquiring firms, and will be focused on financial resources, especially funding, and they will also be interested to understand the process for integration of each acquisition and the level of resources available.”
Where acquisitions complete without prior regulatory approval, the FCA warned it may use its enforcement powers to object to the transaction or initiate criminal proceedings.
McCullam says: “This is a clear signal that the regulator is serious about ensuring overall firm ownership clearly demonstrates that a firm is a responsible entity that carries a commitment to its customers and position in the overall market.”
Rennison adds: “Our experience is that share transactions nearly always take place with the section 178 change in control process being followed appropriately. We have only ever seen one instance where it wasn’t, involving an overseas acquirer who acted out of ignorance without taking professional advice.