In 2012, the Financial Services Authority implemented the Retail Distribution Review, a radical overhaul of the rules governing financial advice in the UK.
And while the regulations were aimed at increasing transparency, improving the quality of advice and levelling charging structures, they would also catalyse fundamental shifts in the M&A market over the coming decade.
Not only did RDR lead to an explosion in deals in the financial planning sector, it profoundly altered the reasons business owners sought to offload their companies, and triggered fundamental changes in the shape and value of the transactions involved and the face of the potential buyer.
These signal movements in the M&A market were not part of the FSA’s RDR planning but they have had wide-ranging ramifications for sellers, buyers and clients over the past decade and put a new face on an established industry.
It’s widely accepted that the RRD was the catalyst behind a boom of consolidation in the financial planning sector.
Over the past decade the estimated transfer of assets has reached £55bn, culminating in a number of large scale acquirers selling on to providers.
But the ramifications went far beyond mere numbers, changing the motivations for selling, the typical structures of deals and approaches to valuation.
It also led to a seismic shift in the makeup of the buyer market.
The RDR in a nutshell
The FSA introduced the RDR in 2012 to improve standards in the distribution of financial services products.
It made several significant changes to the way investment products were distributed, and how client service was delivered.
Most notably, the RDR raised the minimum level of adviser qualifications, changed the way charges and services were disclosed and, notably, banned the use of commission payments from certain product types to financial advisers.
The FSA cannot have known at the time precisely what incidental effects this would have on M&A in the sector but the shifts would be significant and, in some cases, dramatic.
Motivation to sell
The drive to increase the minimum qualification level was very much the strongest catalyst at the start of the mass consolidation of the IFA and financial planning market.
Put simply, many single-adviser firms with owner-operators heading towards retirement did not want, or perhaps were not able, to reach the required level of qualification to meet RDR requirements.
The proof? A year after RDR’s implementation, the FSA released data showing that 20 per cent of advisers said ‘enough is enough’, choosing to retire early, either through selling their business or simply winding up the business and shutting shop.
RDR really made a clean sweep of businesses, and what was left behind were companies with well-developed operational structures able to withstand and ride the wave of future, fundamental regulatory changes such as MIfid II and, most recently, the consumer duty.
