The FCA has published a multi-firm review on consolidation in the financial advice and wealth management sector, examining how groups manage risk, debt, governance and integration during and after acquisition.
In terms of good practice, key findings included:
- Groups with a clear structure, strong governance and risk management processes are likely 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, capturing capital and liquidity needs created by these risks.
However, the FCA also noted several practices which could increase harm, including:
- Groups which are not prudentially consolidated, leading to a difficulty recognising, measuring or mitigating group risk, and potentially limiting regulatory oversight of group debt, goodwill and associated risks;
- Group debt arrangements weakening the resilience of regulated entities, including 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; and
- Groups failing to grow their compliance and governance infrastructure to keep pace with their rapid growth.
The FCA is not setting new expectations, but calls for firms to review the findings with a view to understanding whether their group arrangements might lead to increased prudential and / or conduct risks.