Regulatory Risk and Rectification – December newsletter

FCA consolidator review

The FCA is explicit that it is not setting out anything new and that its recent publication is a reminder of existing expectations. For some firms this means that no action is required, with the outcome of the review serving to provide comfort in their own practices. For others it will serve as a warning and the industry will be watching to see the next steps from the FCA where firms have not heeded this warning.

As expected, a common theme throughout is the proactive monitoring and management of risk with firms demonstrating clarity in their governance and a commitment to the Consumer Duty.

Where areas for improvement have been highlighted it’s not clear whether individual firms displayed only one or multiple of these oversights, or across how many firms these behaviours were observed. It’s also not clear the severity of some of the poor practice observed.

This suggests that the FCA does not view any oversights as a systemic cause for concern. Given the FCA’s re-iteration that it is not introducing anything new, this suggests that for now a gentle reminder of its expectations should be enough to bring consolidators into line. However, the question stands – what will the FCA’s next steps be if there are no improvements?

The review focussed on a number of key areas:

Group debt management

The FCA are rightly concerned about debt guaranteed by other entities in the group which may lead to a weakening of the resilience of the firms. Firms demonstrating good practice had robust group debt management procedures, with early warning indicators flagged at board level.

Group risk management

One of the underlying principles of good risk management is that a holistic approach is taken. This includes looking at the group as a whole rather than isolated business units. Where groups neglected to consider group risk, firms did not consider how inter-connected entities within the group are, and risks that may impact upon multiple entities (e.g. shared services/revenue streams).

Group structure and approach to consolidation

Complexities can arise where offshore holding companies or dual-parent structures are used. This can limit regulatory visibility over the group as a whole.

Acquisition and integration approach

Given our significant experience in acquisition support, we understand the importance of good due diligence and agree with the FCA that this is something that should not be viewed as a “tick box” exercise. One of the main risks arising is firms rushing into acquisitions to keep pace with rapid growth. As a result, some firms were finding themselves needing substantial further investment, thereby stressing the importance of defining a clear acquisition strategy.

Governance and resourcing

It’s clear from the review outcomes that Consumer Duty is at the heart of the FCA’s message. It’s no surprise that clear, strong governance is being highlighted as evidence of best practice. Whilst there is no indication of a discouragement of the rapid growth of consolidator firms; there is caution that firms must ensure that their governance framework keeps pace with this growth.

Conflicts management

Some firms provided explicit or implicit incentives for advisers to steer clients to group products. As with the other areas for improvement it’s not clear from the review the level or prevalence of this behaviour and it may be a result of complicated group structures and quick expansion. Whether implemented knowingly or not is left to speculation, but the FCA reminds firms of the Principles for Business and rules on inducements.

It’s evident from the outcome of this review that whilst the FCA believes current expectations are sufficient, they are only effective if everyone plays their part. At present, they don’t believe that all firms are following best practice with some leaving aspects of good governance as a secondary thought. It may be a symptom of the rapid growth seen in recent years, but the FCA is unlikely to be forgiving if there is no evidence of an improved attempt to meet these standards where firms are lacking.