In an unusual move sure to provoke comment, the UK's competition watchdog has blocked the merger of two fintech firms, arguing that the enlarged entity would have have dominated a section of the wealth and technology sector. The action shines a light on industry consolidation, choice and barriers to entry in this space.
The UK’s Competition and Markets Authority yesterday ruled that wealth technology firm FNZ’s purchase of Australia-listed rival GBST in November last year could cause a “substantial” cut in competition. Options include FNZ selling all or part of GBST, the agency said in a statement.
FNZ’s purchase of the Brisbane-based firm is controversial amid concerns that it would create a business dominating the market. The CMA’s statement said the merged business would have been “by far the largest supplier in the UK, holding close to 50 per cent of the market”.
London-based FNZ agreed a £150 million ($196.9 million) deal to take over GBST, media reports had said at the time. Its competitor, Bravura, had agreed a non-binding deal to buy GBST earlier in 2019, but FNZ made an offer that pushed that deal aside.
“Following its in-depth ‘Phase 2’ investigation, the Competition and Markets Authority (CMA) has provisionally found that FNZ’s purchase of GBST could result in a substantial lessening of competition. This could lead to UK consumers who rely on investment platforms to administer their pensions and other investments facing higher costs and lower quality services,” the CMA said.
The CMA, which had flagged its concerns back in March this year, said it provisionally considered that FNZ and GBST compete closely in a concentrated market with “few other suppliers”.
The regulator’s decision to slap down the deal and call for a partial or wholesale divestment of the acquisition highlights how consolidation in the fintech sector is causing concerns about choice and competition. The stakes are high at a time when rising regulatory pressures on firms often force them to hike tech spending. Rising client expectations and the COVID-19 pandemic have accelerated demand for digital innovation, giving arguably more market leverage to tech firms.
“In particular, the CMA’s investigation found that FNZ and GBST have competed consistently against each other in recent tenders to supply major investment platforms in the UK and that customers view them as close alternatives,” the CMA said.
Only one other supplier, Bravura, offers similar capabilities, the regulator continued.
“The evidence we’ve seen so far consistently points in the same direction – that FNZ and GBST are two of the leading suppliers within this market and compete closely against each other. That’s why we’re concerned that their merger could lead to investment platforms, and therefore indirectly millions of UK consumers who hold pensions or other investments, facing higher fees and lower quality services. We’re now inviting comments on our provisional findings and possible remedies,” Martin Coleman, chair of the CMA inquiry group, said.
“FNZ notes that the CMA has published the provisional findings of its phase two investigation into the acquisition of GBST. We have no comment at this stage," a spokesperson for FNZ told this publication when asked about the matter yesterday.
In July last year FNZ acquired wealth management technology provider JHC to form one of the top broking platforms in the UK. London-based JHC’s platform technology underpins a number of prominent asset managers, including AJ Bell, Brooks Macdonald, Charles Stanley, LGT Vestra and Quilter. More specifically, the firm’s Figaro, Neon, and Xenon software services are widely used by financial advisors for managing portfolios and risk analysis down to meeting ever changing compliance needs.
In February this year, FNZ, said that it had secured an investment from Temasek, the Singapore-based sovereign wealth fund. Temasek joined existing investors Caisse de dépôt et placement du Québec (CDPQ) and Generation Investment Management LLP (Generation), who acquired a majority stake in FNZ in October 2018, in a deal that valued the company at nearly £1.7 billion at the time.