The Financial Conduct Authority (FCA) has announced a multi-firm review of consolidation practices in the financial advice market. This review is part of its latest letter to financial adviser CEOs, aiming to address the potential risks associated with recent acquisition trends, particularly those funded by debt.
Key Focus Areas for Firms
The FCA said in its letter that it expects firms to carry out several checks prior to consolidation, including, but not limited to:
- Regulatory Approval: Firms must notify the FCA and obtain its approval before acquiring or increasing control in any regulated entity.
- Governance and Culture: Firms should ensure that good consumer outcomes are embedded in their culture, supported by effective leadership, governance, oversight, and control arrangements that are appropriately resourced and scaled to the firm’s growing size and complexity.
- Due Diligence: Firms are required to conduct thorough due diligence on the selling firm or client bank to identify any potential risks and ensure seamless integration.
- Maintain sufficient financial resources: Firms using debt to finance acquisitions must have a credible plan to service the debt, supported by realistic and stress-tested financial projections. If part of an investment firm group, they must also comply with the FCA’s prudential consolidation rules.
Concerns over Ongoing Advice Services
The FCA also raised concerns with ongoing advice charges, outlining analysis which shows 90 per cent of new clients are placed into arrangements for ongoing advice.
The FCA again reminded advice firms that they should ensure their ongoing service provides fair value and all charges should be clearly explained to clients, including options to cancel.
Earlier this year, the FCA wrote to the 20 biggest advice firms asking for data on their ongoing advice services for clients.
The FCA plans to publish an update on its findings and next steps later this year. The regulator emphasized that firms must carefully consider the relevance and costs of these services for all clients and ensure they are not charging for services that are not being delivered.
Potential Impact on the Industry
With the regulator sharpening its focus on governance, firms must align their strategies to ensure compliance, prioritize client outcomes, and support sustainable growth in the evolving advice market.
Louise Jeffreys, Managing Director of Gunner & Co. commented, “The expectations are all fairly obvious, and for most buyers will not cause any real concern. They constitute the standard steps of delivering a good acquisition outcome for the buyer, seller and clients.
Modelling out the cost of debt for a deal, alongside the return on investment is essential to ensure the buyer is paying the right price for a firm. The increased cost of debt is being reflected in business offers. This has led to business valuations softening from a 2022 high of averaging 4X recurring income, to sitting at an average of 3.5X recurring income in 2024.”