FCA eyes action on client book purchase deals

FCA eyes action on client book purchase deals

Advice firms buying books of clients could end up with a “huge” amount of work on their hands as the Financial Conduct Authority is understood to be planning severe restrictions on such deals.

FTAdviser understands the FCA is considering strict new rules that could mean until a new client agreement is put in place, clients cannot be billed for on-going services, even if there are no changes to the services and charges.

The impact of this rule change would be widespread according to Brian Spence, managing director of Harrison Spence, who said 70 per cent of sales in the advice sector are asset-based rather than equity-based.

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He said: “There will be a huge amount of work in buying a client book [if these rules come in].

“A prohibition on novating many charges until new agreements have been signed has implications for both sides of an asset purchase deal.

“Both vendors and acquirers need to be precise and proactive when integrating clients into new propositions.”

Contracts of sale are likely to become increasingly complex as acquirers move to protect their interests, he said.

This could include additional contingencies on the basis of the number of clients having signed the new adviser agreement rather than a straight forward multiple of trail fees.

Mr Spence added that two years ago asset sales made up 90 per cent of deals and he said the trend away from these deals would probably continue if the FCA took action on this.

Last year the FCA contacted a number of consolidator firms for information on the suitability process when acquiring businesses.

During the FCA’s consolidator review the regulator visited Attivo Group, and suggested the company amend its process for post-RDR remuneration that transferred to Attivo on a bulk novation.

The regulator asked that it include disclosure of any client specific fees that are ongoing and a mapping of the service from the previous adviser to Attivo’s.

It also recommended a 30 days right to cancel cooling off period.

Stephen Harper, the chief executive of Attivo, said he agreed with the FCA on this issue.

He said: “I believe this is a very big issue for the industry going forward.

“We see in the acquisitions we do that a number of advisers have a ‘reactive service’ for lower value clients. This may not be deemed a proper service in the FCA’s view. And quite rightly so.

“I do believe the regulator is complete right to be aware of this and be on top of any firms that are not actively delivering a service to their post-RDR fee paying clients.”

Analysis by Imas showed that in July, immediately following the UK’s vote to leave the European Union, showed merger and acquisition activity slowed almost to a halt.

But Mr Spence said there has been less M&A activity in the active market because of “natural causes”, with businesses being “here to stay” and focusing on profits.