Over the past few years we’ve seen an enormous wave of M&A activity in the Financial Planning and Wealth Management sectors. It’s been largely unchecked - until now.

In a multi-firm review, the FCA has effectively said ‘hold on a minute.’

While it has not rejected the idea of consolidation, something it could probably not do, it has raised its eyebrows at some aspects of consolidation which could be causing ‘harm.’

Now ‘harm’ is an over-used regulatory word these days but it implies that some aspects of a particular action could be detrimental both to the market and consumers.

It’s no secret that some groups, including some reported on by Financial Planning Today, have come unstuck with their often rapid expansion plans and quick-fire M&A activity. Some groups have got into financial difficulties, some have had to reshuffle management teams, often several times, or look for bigger firms to absorb them to get out of a financial hole.

Of course, in essence the FCA intervention is a bit like shutting the gate after the horse has bolted but it does mark a significant move by the regulator and it’s one that consolidators and private equity firms, which have fuelled much of the M&A activity, will have to take note of and consider seriously.

It's worth noting that the FCA is not banning consolidation - just trying to encourage better consolidation and warning of the potential negative consequences.

The FCA review has, indeed, highlighted the good and bad side of consolidation.

According to the report, among the practices that can cause harm are groups which are not prudentially consolidated; group debt arrangements weakening the resilience of regulated entities and regulated entities transferring cash to unregulated parent companies (upstreaming) via intra-group loans or guaranteeing the holding company’s debt, exposing them to the group’s financial and operational risks.

Groups may also fail to expand their compliance and governance infrastructure to keep pace with their rapid growth

On the positive side good practices include: groups with a clear structure, strong governance and risk management processes being likely to be better placed to achieve sustainable growth and deliver good outcomes for clients, staff and shareholders; groups ensuring regulated entities were well resourced and resilient despite debt levels elsewhere in the group and groups considering risks across all entities.

The FCA review does not mean the end of consolidation and M&A but it does mean acquiring firms will need to take a little more care with their deals and be aware that the regulator is watching.

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Kevin O’Donnell is editor of Financial Planning Today and a journalist with 40 years of experience. This topical comment on the Financial Planning news appears most weeks, usually on Fridays but occasionally other days.  Email: This email address is being protected from spambots. You need JavaScript enabled to view it. Follow @FPT_Kevin 

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