What PE firms need to know about FCA’s consolidation review of M&A deals

The Financial Conduct Authority (FCA) is set to publish the results of its review into M&A deals in the regulated sector this year. The FCA began its consolidation review in 2024, focusing on an examination of (mostly PE-backed) wealth management consolidators.

The FCA’s focus follows the market trend of consolidation of investment advice firms through M&A deals. The FCA’s concern is that consolidation in this sector brings many regulatory risks and that there needs to be a sharper focus on governance, regulatory compliance and maintaining client outcomes.

As the review is now steaming ahead, we advise that those active in the M&A sector need to review their policies when dealing with regulatory capital structures. In this market, merely filing change in control applications with the regulator is unlikely to be enough. We expect the FCA to insist upon significant engagement with it prior to any sale, in respect of a redesign of group structures, a review of capital structure and an address of client/consumer harm that could arise from a sale of the target group.

The FCA wrote to CEOs in October 2024, setting out its expectations of financial advisers and brokers – focusing in particular on private equity deals. The letter set out a series of expectations from firms which included notifying the FCA of any proposed deal involving a regulated firm and then providing a strategy to ensure the delivery of good outcomes for consumers, proper due diligence and adequate funding/ resources.

The FCA stated that it expects firms to carry out several checks prior to any consolidation, including:

• Regulatory approval: obtaining FCA approval before acquiring or increasing control over any regulated entity
• Governance and culture: focusing on good consumer outcomes, effective leadership, governance and oversight and resourcing
• Due diligence: should be considered, focused and full
• Maintain sufficient financial resources: firms using debt finance for buy-side acquisitions must show the debt is serviceable supported by detailed financial projections.

Next steps

PE firms should be mindful when dealing with regulated entities that the review is ongoing. They should expect the FCA to be an active part of the process – not limited to approving controllers or variations of permissions.

We expect to see an active role of the FCA in designing new group structures and stress testing financial projections and the customer journey.

Where previously only limited regulatory due diligence may have been engaged, we now expect the FCA to demand a full targeted regulatory due diligence piece, with a real focus on protecting customers from harm, and on Consumer Duty implications.

We are expecting new publications from the FCA imminently. For now, it’s watch this space, but it is prudent to start preparing for a far more active regulator in this market and ensure you have the necessary regulatory and compliance support lined up to assist.