The regulator recognises that while consolidation can provide benefits, various types of harm can occur where this is not done, it says, in a prudent manner with effective controls to promote good outcomes.
Ben Hammond, managing director – consulting and insight at the Lang Cat, says the FCA is concerned about the importance of operational resilience and the potential risks if large consolidators fail.
He adds: “If you've got a consolidator who goes out and buys 10, 15, 20 firms this year at £100mn each, all of a sudden they've got a couple of extra billion quid in AUM with relatively large portfolio sizes.
“How do you keep track of all that and the data that sits behind it, and the consolidation of systems and everything else? The more capacity there is, the more potential there is for things to go wrong.”
Whittle says the potential for harm can vary by acquisition structure but prudential considerations are key, adding that the regulator tends to scrutinise deals heavily to understand whether the regulated entity – and resulting group – will have the necessary resources to carry on its regulated business and be able to meet its applicable regulatory capital and liquidity requirements post-acquisition.
Whittle adds: “The rules relating to regulatory consolidation will need to be considered and will have a fundamental impact on the structuring of a deal.
“The impacts of an acquisition on the existing governance of a firm will also need to be considered, and where there are changes there is the possibility of more FCA-approval filings for approved person/ senior managers.”
As they grow in size consolidators can become quite complex models, leading to a challenge in managing large numbers of firms and customers in a consolidated environment.
Hammond says: “We've got these firms that are growing at an increased rate of knots, and they're getting to a large size, in terms of assets, advisers and staff.
“If one of them fails, or the backers decide to pull out, what's the backup there?"
Hammond adds that negative news stories about client charges increasing may also be prompting the FCA to step in to take a better look at the market.
This review comes at a time when the FCA has expressed concerns about ongoing advice arrangements, after the regulator found that 231 firms had charged for ongoing advice but not delivered.
The issue affected 6,108 clients out of a total of 213,128 (2.9 per cent) who had paid for, but did not receive, an annual review in 2022.
