Business integration in wealth management M&A

The wealth management sector has seen significant activity in recent years, with M&A transactions taking place at all levels of the market.

FCA and PRA regulated entities in a variety of sectors use consolidation to drive growth, promote innovation or take advantage of cost synergies. Scale and diversification are key drivers in the wealth management sector, and acquisitions can be very helpful in expanding access to specific asset classes, geographical locations, clients, and the expertise of key managers. 

In this series of articles we look at a variety of aspects in M&A transactions that can affect value, for buyer or seller, and propose ways of addressing these in the commercial terms to enhance value.

Our earlier articles looked at ways to structure a transaction around value, other key issues to consider when structuring a transaction, the key regulatory considerations in wealth management M&A and retention and incentivisation of key personnel.

In this final article in our series we look at business integration. This is an area of M&A that can often be overlooked, but it is a critical component of a successful deal and can affect value and client retention if not factored into the M&A process at the start.

Business integration in wealth management M&A

Deals in this sector typically require an interim period between exchange and completion. The purpose of this is to await regulatory change in control approval or to give clients sufficient notice of the transfer or, where required, time to consent to the transfer of their business to the buyer. 

This interim period can be used for planning to integrate the business and bring key personnel together. This can help with the success of an acquisition in the long run, subject to careful limitations being put in place to avoid breaching any relevant change in control rules or, if relevant, competition restrictions before completion has taken place.

Interim committee

The Share or Business Purchase Agreement (SPA) often provides for the formation of a committee populated by senior representatives of the buyer and seller. This committee serves as a forum at which issues relating to the fulfilment of any conditions to completion can be discussed, any issues with the transaction’s progress towards completion can be shared and, crucially, any complex operational decisions can be addressed. The role of the committee will often be to focus on the customer-facing and back-office IT of the target, to ensure that the client migration on completion and continued client support happens smoothly.

This process allows senior people at the buyer to become familiar with the target while also overseeing anything which could affect value in the interim period. It may also assist with the integration of key employees at the target. As a matter of good governance, it is important to ensure that such a committee is populated by a mixture of sufficiently experienced and senior people who can provide oversight and new perspectives (likely including C-suite executives) and ideally too those who have been more deeply involved "at the coalface" of the deal.

Data migration and operational resilience

Transferring data to the buyer is a complicated but crucial element. Both parties (particularly the buyer) may need to access the information in the various databases and datasets during the migration period, and proper planning around the mechanics of data migration is essential. Ideally the project timeline for migrating data will allow for small-scale rehearsals using test data, including a "dress rehearsal" using a larger amount of live system data that has been backed-up elsewhere, ahead of the actual switchover / data migration date(s). These typically take place over a weekend to minimise the impact of data being temporarily unavailable. Bear in mind that migration of large datasets (terabytes rather than gigabytes) can take several days rather than mere hours, depending on network speeds, etc.

The FCA’s and the PRA’s fines for TSB (totalling almost £50 million) in late 2022 were in relation to a series of operational resilience failures in a large-scale IT outsourcing project. The data migration phase of the project had, in and of itself, been successful, but ultimately the failures that followed post-migration stemmed from poor planning, weak governance and a lack of organisation to implement adequate risk management systems. For example, TSB’s planning was not on a sufficiently "left-to-right" basis (taking one step at a time, testing and signing off one part of the process before moving to the next). Some of the data migration-related reviews were too limited in scope, or were expressly stated to be "point-in-time" reviews which the TSB board did not revisit at crucial junctures, and business continuity procedures were inadequate, failing to reflect the genuine experience of TSB’s customers.

Client onboarding, data processing and marketing

It may be necessary for the buyer to refresh "know your client" (KYC) information and / or to run new anti-money laundering (AML) checks on clients, and that may be done with or without post-completion assistance from the seller. There will also be some steps to take to comply with GDPR rules concerning data protection (most notably, so that the buyer has provided the clients with a copy of its privacy notice explaining how their personal data will be processed following competition of the transaction). In particular, where the deal is structured as an asset sale, there will be further steps in respect of the direct marketing rules (if the buyer needs to obtain new consents from clients in order to lawfully send them direct marketing emails, or if the buyer wants to establish its own "soft opt-in" with clients, which involves the clients being given an opportunity to object to marketing emails at the time their contact details are first collected by the buyer, and an unsubscribe link being included in each subsequent email).

Transitional services

Any operational issues which remain outstanding at completion (or where there is a period after completion where the buyer will need to rely on the seller for IT and related services) should be dealt with by a Transitional Services Agreement (TSA). It is very likely that the interim committee will have identified services which the target will need to access on day one following completion which cannot be set up immediately. A TSA should be put in place to give access to services such as custody services for less liquid assets, IT support and access to client files. The TSA governs the extent to which the seller supports the buyer and both parties provide resources to give effect to the deal. Care will also need to be taken to ensure that the entity providing the transitional services is permitted to do so under the applicable regulatory rules.

Transitional services are commonly provided for a period of six to 12 months following completion. There may be good commercial reasons to aim for a particular length of time. The buyer will want to move on from transitional arrangements to avoid excessive fees and to focus on other projects, while sellers will be keen to make sure that there is a determined point at which their obligations will cease. Either way, it will usually be sensible to agree a detailed project plan for the TSA, or at least to set milestones for the delivery of transitional services, and the points in time where functions will be completely handed over to the buyer.

The TSA should usually include, or be accompanied by, an IP licence which allows the buyer to use the seller’s IP insofar as it relates to the target for a specified period following completion. In some cases, though, the buyer will purchase outright the target’s business name, branding and other IP rights. The buyer may also purchase all the copyright in software systems, etc. that it needs to operate the target business post-completion, such that no IP licence is necessary.

It is good practice for a TSA to include detailed service descriptions and certain "key performance indicators" (KPIs) concerning the quality, speed, volumes etc. of the services that the buyer requires from the seller. This is typically an area where the buyer "gets what it pays for". As such, driving too hard a bargain with the seller in terms of the KPIs the buyer expects (and / or the fees or other consideration that the buyer will pay to the seller for its assistance) is usually not something we recommend. In the financial services sector, where regulated firms have duties to protect the consumer, this ought not to be overly contentious, but a good working relationship between members of the interim committee can be key to negotiating these more commercial points successfully.

Other key components of a TSA typically include liability, indemnity and insurance provisions, and it is worth thinking about who can cause more harm to whom if things go wrong (generally the seller as service provider can cause greater losses for the buyer as service recipient but that is not always the case). It is usually necessary to notify insurers to discuss whether they might perceive that the TSA arrangements could have a significant effect on a party’s liability exposure for the period that transitional services are being provided.

Finally, regulated firms will also need to consider whether any TSA may constitute an outsourcing of “critical or important functions” for the purposes of the MiFID Org Regulation (the MiFID Org Reg). To the extent that it does so, Articles 30 and 31 of the MiFID Org Reg will apply. This would require certain provisions set out in Article 31 be included in any TSA, as well as imposing various general duties on the outsourcing firm. Regardless of whether the MiFID Org Reg is engaged, firms will also need to consider the general outsourcing provisions set out in SYSC 8 of the FCA Handbook.

Updating domain name and trade mark registers

Finally, there will be some other administrative tasks for the buyer post-completion, including the updating of domain name registries (contacting the relevant "registrars" which may require the co-operation of the seller and so is usually dealt with in the SPA or TSA) and trade mark registries (contacting the Intellectual Property Office, in the UK, and any other relevant operators of trade mark registries) to record the buyer’s ownership of any domain names and registered trade marks which have transferred from the seller as part of the transaction. IP registers should also be updated post-completion to acknowledge the recording or the clearing of loans secured against IP assets (for example, if the seller had taken a loan from a third party, secured against a registered trade mark, and that loan was paid off as part of the deal).