Consolidation of financial advice firms could lead to poor outcomes for consumers, a new review by the Financial Conduct Authority has found.
A multi-firm review into consolidation in the financial advice and wealth management sector found consolidation can support efficiency and growth by pooling resources, expertise and infrastructure and enabling long-term innovation.
However, if fast growth of these businesses is not managed, the FCA warned it may create poor outcomes. These could include poor client service, failure of business continuity and disorderly failure.
The regulator set out a number of good practice examples, as well as practices which could increase harm.
It said groups with a clear structure, strong governance and risk management processes are likely better placed to achieve sustainable growth and deliver good outcomes.
In contrast, groups which are not prudentially consolidated could increase harm, the report showed. It can lead to a difficulty recognising, measuring or mitigating group risk and may also limit regulatory oversight of group debt, goodwill and associated risks.
The FCA also cautioned against group debt arrangements weakening the resilience of regulated entities, including regulated entities transferring cash to unregulated parent companies via intra-group loans or guaranteeing the holding company’s debt, exposing them to the group’s financial and operational risks.
It added that groups that fail to grow their compliance and governance infrastructure to keep pace with their rapid growth also run the risk of increasing harm.
It said some firms may need to improve due diligence, monitoring and resourcing of the consolidation process and ensure they have the ability to adapt processes to the client/staff profile of the acquiring firm.
While the FCA did not set out any new expectations for firms it said its findings should be considered by companies undergoing consolidation.
The report said: “If you are a firm with this business model, you should factor in the nature, scale and complexity of your business when considering these findings and their underlying principles.
“Compare our findings to your firm or group’s arrangements to see if your arrangements might lead to increased prudential and conduct risks.
“Consider where you may need to reassess your risk management arrangements or group structure to deliver resilient and well-managed growth, in line with the Consumer Duty and in the best interest of market integrity. These attributes are likely to support timely change in control processes.”
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