If not properly managed, the ongoing consolidation of the retail investment business in the U.K. poses risks to investors, according to a report from the UK’s Financial Conduct Authority (FCA).
On Friday, the regulator published a review that examined the results of consolidation in the financial advice and wealth management sector, including how merged firms have managed risks, debt, governance and the integration of their businesses.
“The review found consolidation can support efficiency and sustainable growth,” it said — but that it can also “lead to poor outcomes for consumers, employees and the wider financial system.”
For instance, when a combination isn’t managed effectively, “This can lead to a difficulty recognizing, measuring or mitigating group risk,” the report said.
Poorly-managed mergers can also limit regulatory oversight of debt, goodwill and associated risks, it noted.
Additionally, a merged entity’s resulting debt structure can weaken the resilience of regulated entities, the FCA found.
“This includes regulated entities transferring cash to unregulated parent companies via intra-group loans or guaranteeing the holding company’s debt, exposing them to the group’s financial and operational risks,” it said.
Consolidation also poses risks where firms don’t build up their compliance and governance capabilities to keep pace with their rapid operational growth, the FCA said.
Among other things, the review found that firms “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 further highlighted the importance of the effectively managing group-wide risks in the acquisition process.
“Firms that demonstrated well-planned acquisition strategies and thorough integration planning were also more likely to deliver positive outcomes for customers,” the review found.
The FCA said it’s not creating any new requirements for firms as a result of the review. Instead, it expects firms to ensure that they comply with existing regulatory expectations and to review their own operations for increased prudential and conduct risks due to consolidation.