The UAE financial advice market was turned upside down after the introduction of commission capping regulation BOD49 by watchdog Insurance Authority (IA).
It has changed the way advisers earn revenue and it may affect more in the region as the IA and the Securities and Commodities Authority (SCA) join forces with the Central Bank of the UAE.
The mass regulatory changes sparked widespread speculation that the UAE advice sector would follow the UK with a consolidation spree.
But several months after BOD49 was implemented, there are few signs of a flurry of M&A deals in the space.
International Adviser spoke to several firms in the region to discuss why the rumoured fire sale has not taken place in the UAE.
Activity
There are not as many firms in the UAE as there are in the UK, so activity in the region will be less.
But there are also few rumours of deals close to happening at all in the market.
Sean Kelleher, chief executive of Mondial Dubai, said that “deals are a current hot topic although the rumour mill has a tendency to warp reality”, while Nigel Green, chief executive of DeVere Group, added that “there are always talks happening regarding consolidation”.
Mark Sanderson, managing director of UK and international at Praemium, said: “Adviser M&A deals are often talked about in the UAE and have been for many years, but few ever actually come to fruition.
“Advisers are self-employed for the most part and will move around for better terms around commission splits so the ‘transfer market’ in the UAE tends to be for advisers switching from firm-to-firm and moving their clients with them.”
DJ Sengupta, co-founder of Capstone Insurance and Bankonus, said: “At present there seems to be minimal activity.
“In fact, there are hardly any discussions around M&A. The current situation with lower revenues, higher costs and debt on the books is not conducive for M&A activity.”
Why are firms not buying or selling?
If deals are not happening in the UAE, despite the majority of people in the sector saying they will, then there must be a reason.
So, why is this the case?
Tim Searle, chairman of Globaleye, said: “You’ve not seen the amalgamation of IFAs since many realised that the writing was on the wall with the regulator years ago were unwilling to listen to constructive guidance on how to create a registry framework in the interests of all parties.
“Their only solution seems to be cutting revenue of the IFA by over 50% thinking this will improve the outcomes for clients.
“The need for advisory coupled to suitability reporting, risk rating, cash flow forecasting, minimum education standards, minimum industry recognised qualifications, commission disclosure and total cost of advice all seems to have passed the regulator by.”
Green said: “It could be that there’s a sense that the industry, and indeed the world, still needs to be more post-pandemic focused before an accurate analysis can be made and, therefore, better deals struck.”
Sanderson added: “The typical advisory business model in the UAE doesn’t lend itself to being an acquisition target due to a lack of predictable recurring income. The majority of firms still make the bulk of their revenue through up-front commissions and a substantial proportion of any recurring income is often paid out to self-employed advisers leaving very little basis to value a business on.”
Price
One of the key sticking points in any negotiation is price. A seller could demand too much or a buyer may make a derisory offer.
The UAE advice market is fairly wealthy and therefore businesses may cost more to buy.
Mondial’s Kelleher said: “Financial advisory firms are a business like any other. There are a few standard pricing formulas and buyers or sellers will engage, as in other business, on the treadmill of premium and discount factors.
“Nothing exceptionally different from any other business.”
Devere’s Green added: “Price will always be an important factor in negotiations, but growth and potential are arguably more critical considerations.”
Legacy
If price isn’t a huge problem, then it could be legacy issues.
Firms could be worried what they are buying, which is especially the case in the UK with the defined benefit (DB) transfer scandals.
Praemium’s Sanderson said: “All financial services firms have legacy of some kind or another and with regulatory standards improving in the UAE all the time, firms have made huge steps forward in that regard, so I don’t think legacy challenges are the issue.
“The question is what would a firm actually be buying? With no CIP and the firms having little or no ownership of the assets through a single custodian, there is always a risk that self-employed advisers simply walk out the door post acquisition and take the assets with them. That’s the real risk, not legacy.”
Capstone’s Sengupta added: “There are many legacy factors. Indemnified commission kept the advisory industry alive for very long and the entire industry never thought of developing alternate models.
“With indemnified commission getting reduced by 70%, firms will have to generate three times more revenues to keep up with debt arising from legacy indemnified commission of previous years. Indemnified commission in the past has also resulted in a situation where no advisory firm has much annuity income from existing portfolio.
“At the same time the industry is going through massive changes. Unfortunately for the advisory industry these changes are powerful headwinds – massive drop in indemnified commission, alternate product availability at lower cost, new firms with digital advice are a few of these.
“These factors are not attractive for investors and will drive acquisition price to very low levels.”
Future
Despite the lack of business currently, advisers expect there to be more deals in the UAE, especially with the pandemic taking effect.
Kelleher said: “As regulators increase the cost of compliance and as client knowledge drives their costs down, the need for volume and scale increases steadily.”
Green said: “I think consolidation is inevitable as the world moves into a post-pandemic era.”
Sanderson added: “As regulator standards and downwards pressure on revenues increase, I think it is logical that firms in the UAE will have to find scale, so some strategic mergers would make a lot of sense.
“That being said while some UK and overseas advice firms are showing an interest in the UAE, I think it is unlikely that we would see a typical consolidator look to make many strategic acquisitions there.”
