In the increasingly competitive landscape of financial services, mergers and acquisitions (M&A) have become essential strategies for growth, expansion into new markets, and bolstering capabilities.
However, M&A transactions come with unique challenges and considerations. In particular, UK firms must navigate compliance with the Financial Conduct Authority (FCA), which may impact the structure and success of any transaction. Understanding and considering these factors is critical to ensuring the success of such deals.
This article outlines the key considerations firms should address during M&A, with a focus on FCA regulations:
1. Cultural fit and strategic objectives
Before entering an M&A transaction, firms must carefully evaluate whether the merger or acquisition aligns with their strategic goals. At a very high level this involves:
Assessing the potential for market expansion.
Strategically managing the initial discussions and messaging around an integration transaction.
Determining how the combined firms’ practice areas complement each other and are able to co-exist in an integrated environment.
Evaluating the cultural fit between the firms to ensure smooth integration.
Consideration should be given to how both firms approach compliance and governance, as differences in these areas can disrupt post-merger integration.
2. Due diligence
Thorough due diligence is essential to uncover and mitigate any potential risks and liabilities. This process should include, but is not limited to:
Reviewing the target firm's financial health, including debts, profitability, tax returns and revenue streams.
Reviewing corporate documents and legal information to include article of association, shareholder agreements, directors’ meeting minutes, shareholders’ meeting minutes where applicable.
Evaluating the target firm's client base, ongoing cases, and client satisfaction levels (including client feedback).
Assessing any potential conflicts of interest that may arise from the merger or acquisition.
Ensuring compliance with FCA regulations, particularly in terms of client confidentiality and data protection.
Reviewing any certifications and quality standards the firm may have achieved and when these are due for renewal.
Considering media/press review to analyse any negative reviews/press articles and reputational issues that could jeopardise the transaction.
Considering any potential regulatory and or other investigations of any board members, partners or staff members.
Reviewing the target firm’s claims history to assist in assessing the potential legal and financial risks associated with past and ongoing claims. This ensures the acquiring firm is not blindsided by unexpected liabilities. The claims history can provide a complete picture of the target firm’s past performance, reputation, and reliability. Claims can have significant financial consequences for firms and knowing the claims history can assist with analysing the true financial health of the target firm. The target firm’s history of claims can impact the reputation of the acquiring firm. Frequent or high-profile claims might indicate systematic issues that should be looked at in greater detail and could tarnish the acquiring firm’s reputation if not addressed.
Reviewing the professional indemnity insurance arrangements of the target firm to ascertain what level of cover is in place, to ensure it is “adequate”, a requirement set out by the FCA (opens a new window). A review of these arrangements can also assist with understanding any potential financial liabilities. Ensuring that there is no gap in coverage is crucial. A lapse in coverage during the transition period could leave the new entity exposed to risks. Reviewing the target firm’s insurance allows the acquiring firm to integrate and harmonise the insurance policies, ensuring consistent and adequate coverage across the newly combined entity.
Early engagement with third party advisors is key and including your insurance brokers will assist in the points raised above.
3. Regulatory compliance
The Financial Conduct Authority (FCA) plays a pivotal role in overseeing professional standards. Firms must ensure:
Adherence to the FCA Conduct Principles (opens a new window) and in particular
Principle 1 – you must act with integrity.
Principle 2 – you must act with due skill, care, and diligence.
Principle 6 – Pay due regard to the interests of its customers and treat them fairly.
Compliance with the FCA Code of Conduct (opens a new window), which outlines responsibilities for managing risks, client care, and business arrangements., which outlines responsibilities for managing risks, client care, and business arrangements.
Proper handling of client monies and ensuring that the firm's accounts comply with the FCA client money rules.
4. Client communication and retention
Maintaining client trust and continuity of service is crucial. Firms should:
Communicate transparently with clients about the merger or acquisition, addressing any concerns and explaining the benefits.
Ensure that clients' matters continue to be handled without disruption.
Seek client consent where necessary, particularly if the merger or acquisition results in significant changes to their representation.
5. Staff integration and management
Successfully integrating the staff of the merging firms involves:
Developing a clear plan for merging different teams and practice areas.
Communicating openly with employees about the reasons for the merger and its expected impact.
Providing training and support to help staff adapt to new systems and processes.
6. Operational and technological integration
Merging firms should integrate their operational systems and technologies to function as a unified entity and this includes effective post-merger strategies. Key areas include:
Developing a detailed integration plan with clear timelines and responsibilities.
IT integration of systems and geographical locations, including standardising case management systems and document handling procedures.
Ensuring IT systems and cybersecurity measures are compatible and robust.
Harmonising billing systems and financial reporting mechanisms.
Monitoring progress and addressing any integration challenges promptly.
Continually assessing post-merger, the impact of the merger or acquisition on firm performance and client satisfaction.
7. Financial and tax considerations
M&A transactions have significant financial implications, requiring careful planning and management:
Evaluating the financial structure of the deal, including any necessary financing arrangements.
Understanding the tax implications for both firms and structuring the transaction to minimise tax liabilities.
Ensuring compliance with accounting standards and FCA financial requirements.
For more information, contact a member of our team.
