Whilst the regulator had said it was agnostic about PE and could see the potential benefits of consolidation, it is apparent that the review team clearly has its sights set on key issues in the market. This has been confirmed by our work with clients forming part of the review and other conversations with market participants. Following the 'light touch' feedback from the FCA's (delayed) Ongoing Advice Services Review in February, wealth management consolidators could still be in for a rough ride through 2025 and into 2026, pending the FCA's industry-wide and bilateral feedback (expected in Q4 2025).
The FCA's focus and expectations
The FCA's plans for multi-firm work to review consolidation within the financial advice market were originally outlined in the portfolio strategy letter of 7 October 2024. In his speeches at the time, Nick Hulme (Head of Department of Advisers, Wealth and Pensions, who is leading the consolidation review) said that the FCA was agnostic as to whether it was a good or bad thing. However, he added that a review was warranted given that 48% of advisers were approached by consolidation firms in the preceding 12 months. Hulme highlighted the need for a review due to observations from FCA supervisory visits that were not always satisfactory.
The FCA's subsequent correspondence with participating firms in Q1 2024, requesting preliminary information, set its focus on two primary areas:
- Prudential: generally scrutinising group structures and debt, compliance with MIFIDPRU consolidation requirements, assessment of group risk in ICARAs, and wind down planning.
- Conduct: focusing on acquisition targets and process, the structure of sales and purchases (including consideration paid and deferred), vertical integration and conflicts, management structures, and the resource adequacy in the second line.
Regulatory context to the review
The FCA's consolidation review team was set to be led by one of the authors of the 2017 supervision review report (on acquiring clients from other firms) which was conducted because "acquisition activity in the investment advice market [had] increased since the introduction of the Retail Distribution Review (RDR) in December 2012". (That 2017 report also set the backdrop to the FCA's ongoing services review (OSR)).
Centralisation and vertical integration, professionalisation, digitisation – and consolidation - were all intended (or, at least, natural) consequences of the RDR and now, over a decade later, the FCA needs persuading this is all to the benefit of consumers, particularly since the introduction of the Consumer Duty in 2023. The RDR replaced (conflict-risky) commissions with adviser charges; agreed by the client but facilitated by platforms and product providers.
Last year's OSR was, in part, about ensuring firms were providing the advice promised and not simply replicating the old commission model by taking ongoing payments for little or no ongoing service. With vertical integration, and advice groups including discretionary and/or platform services, this has created both a new source of fees and potential conflicts. Our expectation at the time, which has subsequently been proven to be the case, was that this was the FCA's working hypothesis.
From a prudential perspective, there has also been a concerted focus post-implementation of IFPR in January 2022. In particular, we have seen various prudential initiatives aimed at groups, including: the FCA's 2023 observations on the implementation of IFPR and FG24/5 on the prudential assessment of acquisitions and increases in control.
Whilst we note that the FCA will have approved these group structures via the change in control process historically, the most recent regulatory publications make clear the intended direction of travel. It is worth noting that all of the recent s166s we have been involved in have had aspects of group prudential matters, whether in relation to the scope of prudential consolidation or group vs. consolidated ICARA processes, as well as from a wind-down planning perspective.
What we've observed
Our clients' and contacts' supervisory engagements with the FCA prior to the commencement of the review revealed several key themes, including:
- Meetings with the consolidation review team focusing on M&A strategy and process;
- Challenges related to contingent deferred consideration, inducements and conflicts management, with some examples of M&A deal structures reported in the trade press;
- Increased scrutiny of PE fund and corporate structures, debt-funding (including with an offshore focus), prudential regulation / consolidation, and change in control applications;
- Interest in firms’ use of trading styles; and
- Various s166 Skilled Persons' reports addressing financial resources, financial crime, suitability, risk management frameworks, second line resourcing and the Consumer Duty.
Firms involved in the review have also shared their experience of the process, from which we have identified a consistent structured format to the review:
Initial Information Request
The first FCA Information Request (IR) of 9 April explained the initial plan to review each group’s business model and strategy and its approach to governance, risk and compliance, particularly in managing conflicts of interest.
The firms selected had to provide the FCA with a first tranche of information by 7 May. This included an up-to-date group structure chart, encompassing all legal entities and their voting rights, including overseas holding companies, and the most recent audited annual accounts and all board members of each entity. The IR set out that once this information was provided, the FCA would plan a series of meetings and additional IRs to complete its work.
Noteworthy items requested in the IR included:
- A list of firms or client banks acquired by asset or share purchase since January 2022;
- The most recent ICARA document(s);
- An overview of the group capital structure, where debt sits (including offshore), the amounts, and any guarantees or material covenants. Plus, details of the rights and obligations of any preference shares;
- High level overview of the group’s:
- acquisition strategy
- integration strategy, including client and staff transfers
- funding of previous acquisitions and plans to fund future acquisitions
- interdependencies, including shared functions or key systems
- Consumer Duty Target Market and Fair Value Assessments for products and services manufactured (or co-manufactured).
Following the information submission, the FCA arranged meetings with firms, generally adhering to a two-stage approach, with an exploratory 'introductory call', followed by a deeper dive across a full-day session.
Introductory call
Introductory calls took place in early to mid- June, with the FCA addressing the following topics:
- Prudential: group structure capital management, ICARA and Wind-down Plan, debt and funding strategy, risk management and financials; and
- Conduct: client integration, liabilities, client detriment and reviews, conflicts of interest and M&A.
Full day meeting
Firms were invited to attend full-day, in-person meetings with the FCA to discuss the group's business model and prudential arrangements, financial resilience, governance and oversight arrangements and operational controls.
Whilst the review may have been positioned as evenly balanced between a conduct and a prudential focus, recent engagement suggests a stronger emphasis on prudential matters. Notably, the FCA team includes individuals with private equity experience and prudential expertise.
Next steps
Our understanding is that the FCA is currently collating the data, likely comparing notes and benchmarking, with a view to publishing its feedback and observations generally, in the first instance. We anticipate this will take the form of a feedback statement, including 'good' / 'bad' practice, later in Q4 2025, with more sensitive matters being picked up bilaterally with firms later in 2025. That said, firms should not wait for the FCA's knock at the door.
We recommend all advice groups (particularly the PE-backed consolidators) proactively address the potential issues arising from the FCA's review, as the FCA's focus will no doubt shift to other firms and groups not included in the initial cohort. There are clearly still further choppy waters for firms to navigate!
