FCA's consolidation review: key takeaways

The Financial Conduct Authority (FCA) has published its review on consolidation in the financial advice and wealth management sector, releasing its findings on 31 October 2025.

We have commented previously on the significant ongoing consolidation activity in this sector. The FCA recognises the benefits of consolidation activity, and the review is intended to support best practices as this consolidation continues, whilst giving market participants further clarity on best practice and areas of concern for the FCA. Benefits of M&A include introducing fresh capital to regulated firms to drive efficiency and innovation, and maintaining continuity of advice in the wider demographic context of financial advisers reaching retirement age. 

Firms active in consolidation should be aware that these areas are likely to be closely scrutinised by the FCA generally, but particularly in the context of change in control applications moving forward. The FCA is keen to ensure that consolidation does not prejudice good client outcomes on a long-term basis and the review highlights certain areas of focus from this perspective, including around poor client service, business continuity and the risk of disorderly failure.

Core principles

The FCA identifies areas of best practice around:

• consolidated groups demonstrating strong governance and risk management processes commensurate to and recognisant of the risks involved in businesses growing by acquisition.
• proper resourcing of regulated entities in the context of consolidation, with sufficient resilience and taking into account debt levels in the wider group.
• post-acquisition risk analysis on a group-wide basis, taking proper account of capital and liquidity needs.

By contrast, red flag indicators are:

• failure to properly consider prudential consolidation as part of the acquisition process, leading to difficulty quantifying group risk and limiting regulatory oversight of debt and other risks.
• group debt arrangements weakening the resilience of regulated entities where security or guarantees in respect of group-level debt are given by those entities.
• governance and compliance infrastructures failing to keep pace with rapid growth.

Specific findings

The FCA noted its concern with a number of practices in M&A, and we can expect these to be a focus of the change of control consent process and ongoing supervision.

• Use of debt to finance acquisitions – this has been a hallmark of private equity involvement in wealth management consolidation over the last decade. The FCA identifies particular concerns where debt is short-term and/or secured against the assets of regulated entities within the group. This is particularly relevant where the regulated entity guarantees wider group debt; this exposes it to a greater degree of risk and potentially reduces assets on enforcement or insolvency, which could prejudice clients and other creditors.
• Heavy reliance on cash generation from regulated activities to service acquisition debt will be viewed negatively by the FCA. It is going to be important for the debt burden to be demonstrably sustainable and not reliant solely on projected cash generation.
• Failure to consider risk at a group level, which could lead to underestimation of interconnected risks and resources. Stress testing is an important factor both to recognise areas of potential risk, and to ensure that contingency plans are in place to deal with a range of situations. A realistic assessment of access to cash in unforeseen circumstances is an important consideration, noting that intra-group receivables and/or goodwill may not actually deliver cash in a crisis.
• Practices that could limit regulatory oversight, including the use of dual-parent structures with one offshore parent, making regulatory oversight harder. Also problematic is the holding of goodwill outside of investment groups, making it harder for regulators to assess the potential uncertainty of value assigned to goodwill.
• Incomplete due diligence of acquisition targets, including failure to give proper consideration to integration risks and failure to properly define success frameworks for all stakeholders. We have often highlighted the importance of integration in M&A, not just from a regulatory perspective but also to ensure the long-term success of acquisitions.
• Failures of governance as consolidators grow, including failure to appropriately scale systems, processes and management expertise (and independent challenge) to account for more complex businesses. In practice, governance arrangements can take time to catch up with acquisitions of underlying businesses, but it is clear that this will be a focus area going forward.
• Certain incentive structures which could constitute conflicts of interest, including incentives for sellers and/or to their staff to achieve certain client decisions in the context of M&A, which may conflict with the Principles for Business and rules on inducements. Deal structures may need to adapt to reflect this, particularly where earn-out arrangements are linked to client decisions.

The FCA is keen to stress that this review does not represent a change of policy. Rather, it is intended to prompt sufficiently rigorous consideration by consolidators of existing standards and to assist firms in proactively addressing risks associated with bad practices. We expect that purchasers will need to be careful to address these areas as part of their deal structures so that they can demonstrate compliance to the FCA.

It is helpful to have clarity from the FCA on the areas of concern, so that acquirers in the sector can address these points in their wider group structuring and deals. In many ways, these areas of focus align with good business practice and a well-structured M&A process. 

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, November 2025