The Financial Conduct Authority (FCA) has warned over high levels of debt and conflicts of interest following a review of consolidation in the financial advice and wealth management sectors.
In its review findings, published today, the regulator raised concerns over the fact that many financial advice consolidators fund their acquisitions with high levels of debt. It said it had found cases where the parent company relied on the profits or cash reserves of regulated advice firms in the group to service the debt.
It also warned that incentives for sellers or staff to achieve “certain client decisions” presents the potential for conflict of interest, which could lead to client harm, such as “inappropriately placing clients into a group product”.
It said this was a particular concern for vertically integrated groups, where advised clients are placed into products offered by other group entities.
“Vertically integrated groups, where advised clients are placed into products offered by other group entities, should properly identify and manage the inherent conflicts associated with this type of business,” it cautioned.
The regulator added that it had concerns about groups failing to invest enough in their risk, compliance and governance teams to keep up with their rapid growth, and that some firms were doing “tick box” reviews before acquisitions, rather than conducting thorough due-diligence.
The FCA said it is not setting new expectations – rather, its findings are designed to “help firms understand those that already exist” so they can make any necessary changes.
