Long Read  

'When bigger isn’t always better': FCA focuses on advice market’s rush to consolidate

“The FCA is, in our view, reminding acquiring firms and individuals to follow the laid down requirements.”

Notifications for changes in control are known as section 178 notices. Firms must let the FCA know when they have made a decision to acquire or increase control in an authorised firm.

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Clare Whittle, counsel – financial regulation group at Linklaters, says: “Prospective controllers of regulated firms are already subject to a robust assessment from the FCA through its change in control application process, which scrutinises, among other things, the suitability of the controller, the rationale and financing of the transaction and the impacts to the firm and its customers going forward.

"The FCA appears to be signalling to the market, however, that it wants applicants to ensure that their levels of due diligence on the target and resulting plans are adequate."

The regulator's message is against the backdrop of the consumer duty regime, under which firms must act to deliver good outcomes for retail customers. 

Since summer 2023, the FCA’s forms for prospective controllers have been updated to ask potential acquirers specific questions on its consumer duty due diligence, any compliance issues identified and remediation measures. Acquirers are expected to disclose their due diligence report/board pack.

A number of factors have been driving the acquisition and consolidation trend:

  1. The amount of private equity capital available and the attractiveness of acquiring financial planning firms because of their 'sticky' income and the stable market created by regulation.
  2. The level of offers for well-run firms makes it attractive for owners to exit.
  3. The average age of many owners of intermediary firms and their proximity to retirement. The adviser base in the UK is a largely ageing population. The majority are aged 50-59 in 2024, which will be driving an element of consolidation as firm principals look to retire and sell their businesses.
  4. The perceived burden of regulation is also leading some firm owners to decide that they want to exit.

The increasing cost of regulation and maintaining technological currency will also be a factor as firms look to gain economies of scale as they combine. 

McCullam says: “This is one of the key factors for investment business, especially in the platform market, where narrow margins and constant cost pressures suggest the need for scale to drive profitability.”

The lower deal multiples in the UK compared to the US makes it more advantageous to do deals in this country, which means private equity remains one of the most prevalent buyers in the advice and investment sector. 

McCullam adds: “The financial advice sector has been largely resilient and generates consistent cash flow and profit for many firms, within a largely fragmented market made up of smaller firms, so the opportunity is there for PE to bring together these firms, enable scale economies and improve growth.

“Although there are concerns about fulfilling the needs of the end customers – the customer doesn’t figure that highly on the agenda of the PE house – and it is understandable that the regulator is questioning this type of move. 

“Large corporates and product providers have also made a play in this space to establish vertical integration where advice is tied to the provider products and investments, however, the change in business model for many advice firms does not necessarily make this an attractive or easy route to accelerate product sales.”