While this article has most relevance to the investment sector and indeed makes specific comment pertaining to that sector, the principles and best practices highlighted apply across all regulated firms …

We are used to seeing papers from the FCA – usually Consultation Papers or Policy Statements, and most of us probably expect that any important information would be communicated in these formal papers. However, the FCA does publish ‘occasional’ papers, from time to time and some of these are quite informative regarding the FCA’s current direction of travel, or in relation to a particular issue that they have been finding in the course of their everyday supervision work. One such paper was published in February 2017, Supervision Review Report – Acquiring clients from other firms.

The paper is not too long and well worth a read for any firms involved in, or considering, the acquisition of clients from other firms.

Business or Assets
The first thing firms need to understand is whether they are buying the business outright or simply buying some of the seller’s assets, namely a client bank.

If the whole business is being acquired, then everything comes over to the buyer, including any revenue streams. Obviously, any integration of the acquired firm, change of name or other business details, change of regulatory status etc. would then require a number of actions, including clients being informed, new terms of business issued when appropriate and, in particular, advising providers in relation to agency related changes and payment of trail commission. The key point is that, for as long as the acquired firm continues to trade as previously, and services and charges remain the same*, there is not much work that needs to be done beyond the courtesy of advising clients of the change of ownership of the firm.

(*If the services and/or charges change following the acquisition, then clients must give individual authorisation that they agree to the changes. This would then be the same process as applies when buying a client bank – see below.)

Acquiring a client bank (not the business)
The FCA’s findings centred around two main aspects …

• the process of agreeing ongoing adviser charges / services;
• the replacement business process – moving the acquired client into the firm’s centralised investment proposition.

Charges / Services
On the charges/services aspect, the FCA found that …

• details of the services offered by the new firm and the associated level of charges were not provided to clients at the start of the relationship;
• differences between the service offered by the new firm/adviser and that provided by the previous firm/adviser were not explained (e.g. differences in frequency of reviews or rebalancing exercises);
• clients were not told about any difference to the tax (VAT) status of the ongoing service charge;
• clients were not told they could opt-out of any ongoing service the acquiring firm intended to provide;
• where historic advice responsibility was not taken over by the new firm, clients were not told about this, and
• clients were not told how they could complain about advice given by the original firm.

Replacement Business

It is likely that the firm will want to move the acquired clients to the investment solutions that match its investment process and proposition. While this is an understandable business objective, there are no shortcuts – each client must be assessed individually for suitability. To ensure it is acting in the client’s best interests, where a firm’s advice is to switch or transfer an existing investment to a new investment, the rules require a cost comparison to be done. One cost a client may incur is a contingent initial adviser charge, levied only if the client goes ahead with the new recommendation. The FCA found that this was not always factored in to the comparison. All relevant costs incurred by the client must be considered in determining the suitability of the recommendation to switch or transfer investment business.