FCA Review Of UK Wealth Management M&A

The Financial Conduct Authority (FCA) is preparing to publish the findings of its review into M&A and consolidation in the UK wealth management sector. This multi-firm review was announced last October in the FCA's Dear CEO letter to advisers and intermediaries and has taken place during the course of this year.

The findings of the review will be of particular relevance to the PE industry where interest and investment in the wealth management sector has increased over recent years. The review is intended to clarify regulatory expectations across governance, conduct and client outcomes. While the FCA has stressed it is agnostic about consolidation and PE ownership, its recent portfolio strategy communications indicate an increasingly data-led and forward-looking supervisory approach, with consolidation identified as a priority area for intervention where harmful risks are not well controlled.

Scope and Focus

The review conducted by the FCA examines several key areas, including ongoing consolidation within the industry, the emergence of potential conflicts of interest, and the increasing prevalence of private equity-backed business models. The FCA has engaged directly with a number of private equity-backed wealth managers in order to assess their operating models and transaction practices.

The regulator has observed a notable increase in acquisitions over the past two years. While the FCA acknowledges that consolidation can provide certain benefits, it has also cautioned that significant harms may arise if transactions are not executed in a prudent manner and without the implementation of effective controls.

In its 7 October 2024 Dear CEO letter, the FCA highlighted consolidation as a key focus and set expectations for acquiring groups. In particular, firms should notify and obtain approval for changes in control, hold adequate financial resources, and ensure leadership, governance, and oversight arrangements are effective and commensurate with the growing size and complexity of the business. Where acquisitions are debt-funded, firms should maintain credible, realistic and stress-tested plans to service debt without compromising client outcomes.

Key Risk Areas Highlighted

The FCA has identified several risk areas as part of its review. These include conflicts of interest, such as the recommendation of in-house products and the provision of incentives for advisers to switch client assets onto affiliated platforms, discretionary fund managers, or proprietary fund ranges. The handling of client assets and the maintenance of service standards following an acquisition are also under scrutiny, particularly in the context of compliance with the Consumer Duty, which requires demonstrable fair value and good outcomes across target markets.

Furthermore, the FCA has expressed concern regarding the influence of acquisition-related debt on fee structures, service levels, and decision-making processes. The regulator expects firms to have credible plans in place for servicing such debt, ensuring that client interests are not adversely affected. In parallel, supervisory engagement has increasingly probed deal structures, including contingent and deferred consideration, inducements and alignment of adviser remuneration, and the management of liabilities and client detriment identified during integration.

From a prudential/capital adequacy standpoint, the FCA's work since the implementation of the Investment Firms Prudential Regime (IFPR) has sharpened its focus on group risks. For investment firm groups, the FCA expects full compliance with prudential consolidation rules under the FCA's capital regime and robust Internal Capital Adequacy and Risk Assessment processes at the appropriate level of consolidation. Recent supervisory activity and skilled person reviews have also examined wind-down planning and capital adequacy in the context of consolidation.

Transaction Expectations and Regulatory Engagement

The FCA has set clear expectations for firms involved in M&A activity. The regulator requires advance notification of proposed changes in control (and highlighted it may take enforcement action if this isn't received). More engagement with the FCA during change in control processes may lead to a more detailed and possibly delayed approval process, which should be factored into completion timelines.

There is also an expectation that buyers should conduct robust due diligence on target firms focusing on the risk areas mentioned above and acquisition history. In addition, firms must develop credible post-completion plans that address the servicing of acquisition debt and the ongoing maintenance of client outcomes.

Market Sentiment and Deal Activity

Industry participants generally anticipate that the publication of the FCA's review will reduce uncertainty in the market and may serve to stimulate further deal activity. Buyers are demonstrating increased selectivity, with a particular focus on enhanced due diligence relating to ongoing client servicing and other areas of regulatory concern. Despite the heightened regulatory scrutiny and the need for more comprehensive documentation, strong and well-capitalised consolidators continue to complete transactions.

Private equity interest in the sector remains high, driven by opportunities to consolidate businesses, capture long-term fee streams, benefit from the anticipated influx of retirement savings, and improve margins through the adoption of new technology. However, it is increasingly clear that the sustainability of such strategies will be assessed through the lens of conduct standards and prudential resilience, including realistic stress-testing of funding models and careful management of integration risks that could otherwise undermine client outcomes.

Next Steps

The FCA's review is expected to be published by year-end. The regulator's broader work through 2025 is likely to include feedback statements setting out examples of good and poor practice, alongside bilateral engagement on sensitive matters.

Firms should anticipate increased supervisory interest and ensure that their practices are aligned with the findings and expectations set out in the review. For investment firm groups, particular attention should be given to prudential consolidation, group risk assessment within ICARA, and wind-down planning, while conduct controls should continue to prioritize conflict management, fair value assessments, and the delivery of good client outcomes across vertically integrated models.

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