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And trending previously too!



During the past year or so, and in tandem with ATEB becoming part of Thistle Initiatives, we’ve become increasingly involved in due diligence work, mainly working on behalf of firms planning to acquire others and getting under the bonnet of the firms they propose to buy.

M&A activity seems to be continuing unabated, with vendors seemingly increasingly keen to ride off into the sunset (while they can), and acquisitors ever anxious to get AUM.

Most firms have already been, or will be, tapped up at some point by consolidators, but before considering any moves, sellers would be wise to take note of what the FCA’s expectations are in relation to client banks following their commentary on 19 December, which can be found here.

Due diligence work is both interesting and challenging at the same time, with prospective vendors obviously doing their utmost to place their firm in the best possible light and acquisitors keen to get their hands on those assets and get them under their own management (more often than not into their own investment solutions), but beyond the commercial aspects, the more of these exercises we do, the more data and intel we accumulate and this reveals some interesting insights. It also highlights trends (hence the article title, which you obviously spotted, being one of our esteemed readers), indicating that some firms still have a lot to do to evidence that they deliver good client outcomes. In some instances you simply cannot begin to imagine what ‘a lot’ means.

So, what does a DD exercise look at?

Well, that really depends upon how deep a dive we’re asked to perform of course and the scope of the review, but generally we’ll ask the vendor firm to provide details of the following:

  • Structure, governance and culture
  • Third party compliance feedback (including file checks)
  • Capital adequacy
  • PII
  • Consumer Duty implementation plans/price and value assessment, etc.
  • Client segmentation/PROD
  • CIP/Investment Committee
  • New business registers
  • Client reviews (and process)
  • DB pension transfers
  • FCA correspondence/interaction/RegData returns
  • Financial crime prevention
  • Complaints
  • High risk business
  • T&C

This isn’t an exhaustive list but it covers most of the bases. For those who regularly read our articles (and if you think people are missing out then please share them, or better still, get them to sign up) this should look pretty familiar, fundamentally because it’s similar to what the FCA has requested from firms in recent data requests. No point reinvesting the wheel is there, because this is where the issues lie in most firms.

We also conduct plenty of advice file checks of course, which include reviews/periodic suitability assessments, and as you’d expect, this is often where we uncover problems. It may be stating the obvious, but the primary product that advice firms deliver is advice, so if this aspect isn’t right then everything else pretty much goes to hell in a handcart.

As part of these exercises we also meet with all the firms and understandably, they are all absolutely resolute that they do the right thing, give great advice, have loyal clients who don’t complain, have robust systems and controls, have competent advisers, get their homework checked, are financially sound, don’t deal with dodgy operators, have the best investment solution out there and that good client outcomes are standard.

It’s good to report that in some firms this is most definitely the case. They appear to be well run, their file checks reveal that their advice is sound and based on solid KYC, their clients receive the service they were promised, and importantly, they can provide evidence to support all their assertions. They keep good records and keep things under review.

But in others…

Put it this way, despite the firms’ assertions, the findings weren’t as described above. Ooh no.

We did establish that all did have PII, that they submit their RegData returns (not necessarily always on time though) and they have new business registers and AML procedures in place (to one degree or another). Beyond RegData submissions few have had any other direct involvement with the FCA, although some are clearly selling up before the data requests land! Most have engaged external compliance support in some form (file checks mainly) and have performed a degree of client segmentation (usually based on portfolio size), but that’s largely where the similarities end. It’s what many don’t do well where the trends become glaringly obvious.

What we found

  • Weak/inadequate KYC
  • Almost total reliance on the RPQ ‘score’
  • Poorly written suitability reports
  • Inability to evidence suitability
  • CIP recommended to virtually every client (shoehorning)
  • Perfectly adequate existing contracts being switched/transferred
  • Extra costs for no good reason
  • Little evidence of investment committee decisions/rationale
  • Client segmentation resulting in some clients getting nothing but an annual statement and an ‘offer’ of a review with no periodic suitability assessment. But OAC continuing
  • Inability to meet PROD requirements
  • Firms using one platform exclusively (for their CIP)
  • Complaints not being regarded as complaints
  • Increased PII excesses for what appears to be standard business
  • Fair value assessments that suggest that the firm thinks what it currently charges is ‘fair’, but without rationale
  • Lack of preparedness for Consumer Duty

What does this tell us?

Well, pretty much what we’ve been commenting upon within these articles for ages! And that lofty opinions mean little if they can’t be backed up with empirical evidence.

These trends appeared from DD activity across a very small number of firms, so what will the FCA find when it requests more data from a much larger sample that it hasn’t previously dealt with? Some of the standards we found were pretty dire. COBS 9.2 has been around since 2007 for goodness sake, it isn’t something new, but based on a lot of the files we looked at KYC was basic at best. Finding a good fact find was like trying to find a cloth cap in a cow field at times.

The regulator has promised to be more intrusive and as we’ve already evidenced in recent articles, they’re very much delivering on this. The findings highlighted above are more common than not and if we find them in a small sample of firms the FCA will find plenty more when it contacts lots more firms.

Just this week one of our firms (who have never had direct contact with the regulator) received a request for its Fair Value and Target Market assessments. Still think that it can’t happen to your firm?



Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

Despite their keenness for AUM, what acquisitors really want to know is if they’re potentially sleepwalking into a problem down the line. The more eager a firm is to sell up the more they usually have skeletons lurking in the closet. In their need to grow AUM acquisitors/consolidators don’t always take on board our findings – that’s their prerogative after all – but as we’ve see so often, when it goes wrong it goes wrong big time. It’s encouraging that some firms do things extremely well and deliver their clients what they promise, but the standards in so many others still leave much to be desired. Read the financial press and you’ll see the usual outpouring of scorn at the regulator (and we don’t disagree with some of the commentary!), but isn’t doing the same thing time and again yet expecting a different result the definition of insanity? We know that the regulator is targeting firms that it hasn’t previously been in touch with, so how long will it be before data requests start landing in inboxes? The clock is ticking for firms that convince themselves that everything is OK, but can’t provide evidence to back it up. Pride before a fall and all that.

Action Required By You

Similar messages in 2024 to those we issued in 2023. There are still lots of firms out there that either aren’t willing to let someone under the bonnet or are too scared to do so. Better us (other compliance consultancies are available of course) than the FCA, so get your business standards checked. If you don’t and the FCA come calling then you can’t say you haven’t been warned.
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About the Author

Paul has in-depth experience across a wide spectrum, having headed up compliance, T&C, monitoring, oversight and MLRO functions previously. He was also an IFA for some time so can see things from more than one angle.

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