This article takes a look at how the new regime in the UK could fuel mergers and acquisitions and affect the shape of such activity.

The UK’s new Consumer Duty regime is up and running. This news service has written a few articles about the impact of it (see examples here and here) and we continue to inspect its effects. In the following guest article, Robert Vaudry, managing director, Copia Capital, gives views about the Duty. The editorial team is pleased to share this content; the usual editorial disclaimers apply. To respond, email tom.burroughes@wealthbriefing.com

Most, if not all, wealth management firms have been busy over the past year ensuring that they are compliant with the new Consumer Duty regulations, meaning that there hasn’t been much time to dedicate to other business activities. However, now that the Consumer Duty deadline of 31 July has passed, it’s very likely that we’ll see the focus swing back again to other activities, with one of these being mergers and acquisitions.

I believe there will be an increase in M&A activity over the coming months in the discretionary fund manager (DFM) sector, as they are an attractive prospect to buyers for two main reasons.

1. It is a growing market
According to the lang cat’s State of the Adviser Nation research, 91 per cent of advisor firms use at least one centralised investment proposition (CIP) in their firm, up from 88 per cent in 2021 and 87 per cent in 2020. And in 2022 two thirds (67 per cent) of advice firms outsourced to a DFM MPS service for at least some clients, while just over half (53 per cent) outsource to a fully-bespoke discretionary service for at least some clients. This compares with 61 per cent and 47 per cent respectively in 2021.

Copia’s own report earlier this year, The CIP: An overheating engine? has shown that many firms are starting to feel that their CIP is becoming “an absolute beast,” with 97 per cent of respondents stating that that CIPs are in danger of overheating and will soon reach a tipping point where they become unworkable. 

As firms continue to grow, this pressure is only ever going to increase and that’s before you consider the impacts of Consumer Duty. There are many reasons why advisors are increasingly outsourcing to DFM’s, including gaining expertise that they don’t have in-house, operational issues and savings in time and resources.

2. Scale is crucial for profitability
There are increasingly high barriers to entry into the wealth management market due to regulation, and Consumer Duty will only raise this bar even further. This has driven up operational costs, meaning that scale is crucial for profitability. 

Precise figures for the size of the DFM market are hard to come by, but there are nearly 200 DFMs currently offering services in the UK, with a handful of large providers dominating in terms of assets under management. While it’s a fast-growing sector, it seems unlikely that this number of providers will be sustainable in the long-term. 

Time for some firms to exit the market?
The Consumer Duty value for money assessment, which had to be completed by the end of April, focused on the value the DFM provides to the end customer. This has resulted in firms having to review the cost of their services and their profit margins, giving them a better understanding of their business and its long-term sustainability within the current regulatory regime, which could result in some deciding it’s a good time to exit the market.

I expect there to be an increase in two types of M&A deals:

-- Scale acquisitions – this will involve larger firms (a good example being Rathbones' recent acquisition of Investec), where they want to significantly increase scale and benefit from the economies of scale from combining businesses. Less money going out while bringing more money in; and 

-- Growth acquisitions – this will involve consolidation among smaller firms, some of whom are looking to exit the market.

As I said above, Consumer Duty has created a perfect storm for M&A among DFMs, so don’t be surprised to see an increase in activity over the coming months. Watch this space!