Consolidation can support efficiency and sustainable growth, but, if not effectively managed, could lead to poor outcomes for consumers, employees, and the wider financial system, a review from the Financial Conduct Authority (FCA) has found. 

The review looked at groups acquiring financial advisers and wealth management firms, although the FCA suggested that the findings could be of interest to any sector considering growth through acquisition. 

The review was launched amid a significant increase in consolidation in the financial advice and wealth management sector through acquisitions in recent years, as the FCA acknowledged that consolidators play a significant role in this sector, including supporting retiring financial advisers who want to ensure their clients continue to benefit from receiving financial advice. 

In particular, the FCA found that groups with a clear structure, strong governance and risk management processes are likely better placed to achieve sustainable growth and deliver good outcomes for clients, staff and shareholders.

It also said that groups ensuring regulated entities were well-resourced and resilient despite debt levels elsewhere in the group. 

However, the FCA found that there were also groups that are not prudentially consolidated, which can lead to difficulty recognising, measuring, or mitigating group risk. 

The FCA warned that this may also limit regulatory oversight of group debt, goodwil,l and associated risks.

In addition to this, it found that group debt arrangements are weakening the resilience of regulated entities, including regulated entities transferring cash to unregulated parent companies (upstreaming) via intra-group loans or guaranteeing the holding company’s debt, exposing them to the group’s financial and operational risks.

The FCA's review also raised concerns around some groups failing to grow their compliance and governance infrastructure to keep pace with their rapid growth.

The watchdog has since encouraged firms to consider the findings of the review, assess their own arrangements and make any needed adjustments to their structures and processes.

The findings come amid a time of intense consolidation for the pensions industry, with the government's Pension Schemes Bill intended to help push the landscape to have 'fewer, larger' better-run pension schemes, or 'megafunds'. 

This has already seen a growing number of mergers and acquisitions being announced, as providers look to ensure they reach the scale needed for future requirements.

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