Regulatory Risk and Rectification – July newsletter

Wealth

On a regular basis, the Isio team will provide insights on current hot topics impacting the financial advisory and wealth market. We hope you find them valuable and welcome your feedback.

This first edition looks at the FCA’s consolidator review and considers the areas firms should be mindful of as the FCA begins to assess responses to their information gathering.

FCA consolidator review

The FCA’s review of financial adviser and wealth management consolidators started with information requests in April. Now we are past the 4 June closing date, the FCA will be assessing replies and determining next steps. So, what are the FCA’s concerns and what actions might they take?

Objectives

The FCA questions imply a specific concern that firms may be structuring their businesses to avoid debt appearing on the balance sheets of UK entities, and using offshore holding companies to avoid debt appearing in consolidated group balance sheets.

There are also a wider set of questions regarding consolidator business models, with the impact of debt funded acquisition on firm behaviours and consumer outcomes a central concern.

The review is looking at firms’ acquisition and integration strategies, and how firms have considered the requirements under the consumer duty, including fair value. The client onboarding journey is a key aspect of this.

Growth and risk

The FCA has stated that it is agnostic about the rapid growth of consolidators in the advisory and wealth management sectors (i.e. the FCA do not see an inherent problem with this). However, the FCA does recognise that the growth of consolidators can bring both benefits and potential risks and therefore the FCA is seeking to assess these risks, and the potential for consumer harm.

What the FCA will be interested in is the risk that certain business models create or heighten. As such, a key area of focus is likely to be whether firms who are funding acquisition through debt are able to meet the repayment requirements without being under undue pressure to grow.

If firms have to acquire to meet targets for increasing assets under management/advice, the FCA will be concerned that this behaviour could lead to poor acquisition decisions, in turn increasing the risk of firms getting into financial trouble and potential failure, as well as leading to an increase in poor consumer outcomes.

For this reason, the FCA review looks to assess both prudential and conduct risks relating to consolidator business models, and it may be the FCA’s intention to assess if there is any correlation between the two. That is, is financial pressure leading to decisions which do not align with the Consumer Duty?

For example, a firm takes on a client bank to help meet its AUA growth target, but the clients are a poor fit for the firm’s servicing model, or there is insufficient resource to deliver ongoing servicing, or the acquired firm is liquidated without any assessment of potential harm in the back book and no provision for possible redress.

Looking forward

We would expect that as the consolidator review unfolds there will be a greater focus on how firms are managing conduct risk, applying the consumer duty, and assessing consumer outcomes. It may be the FCA’s intention to select some of the firms involved for more detailed file review assessments.

Areas of focus

Key areas of focus relating to conduct risk for consolidators should include:

Target market	Has the firm set out the types of clients it will take on, and how the services it provides meet the needs of acquired clients? How does the firm assess potential new acquisitions to ensure clients fit its target market?
Fair value	Do ongoing services to acquired clients provide appropriate benefits for the cost? Are the services being used by the clients? Are there a range of fee and service levels to meet differing needs?
Client information needs	Are clients given information on new fees and services before the acquisition? Are changes explained? Are clients told they can opt out of ongoing services?
Consent to adviser charging	How does the firm manage the transition of clients from the existing service to its own offering? Is the firm obtaining consent from clients before switching adviser charging from the acquired business?
Conflicts of interest	How does the firm identify and manage conflicts that may arise from acquisition? If advisers are incentivised to switch clients to the firm’s Centralised Investment Proposition, how is the risk of unsuitable advice mitigated? How does the firm ensure that transfers to its services and products are in the clients’ best interest and advice is suitable?
Vulnerable customers	What steps does the firm take to identify customers with characteristics of vulnerability in the acquired client base? How does the firm provide additional support?
Polluter Pays	Has appropriate provision been made for past business liabilities of the acquired businesses? If the liabilities are not taken on by the acquiring firm, how will any claims be met? Is there run off PI cover and have all complaints been resolved? If ‘high risk’ activities were undertaken, has the risk of consumer harm been assessed and mitigated? Were entities properly de-authorised before closure?

How can Isio help?

End to end review of acquisition conduct risk: target market and client segmentation; client onboarding and journey; service offering and contracts; charges and disclosure; delivery.

Review and comparison of past and current processes and practices against FCA rules and guidance. Recommendations for improvements and priority actions.

Deep dive into acquired client file records to assess client outcomes and the quality of records. Scope, design and implement any required remediation exercise.

Review the internal controls framework as well as guidelines and parameters adopted by the internal quality checking function and how this operates in practice.

Regulatory Risk & Rectification

Supporting firms, regulatory bodies and employees to understand, manage and mitigate the costs and risks associated with regulatory challenges.

Regulatory Risk & Rectification

Supporting firms, regulatory bodies and employees to understand, manage and mitigate the costs and risks associated with regulatory challenges.