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Andy Sutherland: Why culture is crucial in acquisition process

Being crystal clear on culture will provide reassurance and contribute to future success

Culture may not be the foremost thought on a firm’s agenda during the acquisition process but failing to give it due consideration can lead to issues and delays further down the line. Here, we look at three reasons why it is so important both target firm and acquirer are clear on it.

1. It is a regulatory requirement
It has long been recognised that culture drives conduct which, in turn, drives the outcomes clients receive.

It is often one of the underlying drivers of non-compliance and, as the FCA has moved towards being a more proactive, forward-looking regulator, assessing firms’ culture has become an implicit part of its authorisations and supervisory approach.

The regulator hopes this continued focus will serve as a catalyst for active evaluation and ongoing monitoring of culture within financial services firms, which will have a positive effect on its three strategic objectives: ensuring appropriate levels of consumer protection, market integrity and promoting effective competition.

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The FCA expects firms to have a client-centric culture which gives appropriate consideration to client needs and acts in their best interests.

But just achieving the right culture is not enough. Firms need to be monitoring it in the same way they monitor other aspects of their operations and take any necessary steps to address areas of weakness.

Although the regulator will not dictate the ideal financial services culture, the roll-out of the Senior Managers Regime to the wider industry means it will be paying even closer attention to how those more senior in a firm shape its behaviours and attitudes.

2. It can provide reassurance
Target firms should be looking to provide potential acquirers with the reassurance their culture is aligned to FCA expectations, grounded in robust governance and delivering appropriate outcomes for clients.

Often, firms do not consider the breadth of factors that can influence an acquirer’s view of their internal culture, from poor record-keeping and back book issues to weak systems and controls.

One such area keenly highlighted during a regulatory due diligence project is the quality of the data room. How quickly a target firm can provide the necessary data for review speaks volumes about its approach to effectively managing conduct risk and, therefore, culture.

3. It contributes to future success
Acquiring companies should seek to understand a target firm’s internal culture in order to determine how it aligns or diverges from their own. Armed with this knowledge, the acquirer can then develop an implementation plan that takes into account any cultural barriers that need to be overcome.

A degree of cultural alignment, no matter how small, can help smooth the integration of the two firms by reducing friction and staff dissonance, while taking advantage of new opportunities.

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Poor culture has been shown to be a common root cause of a number of instances of poor outcomes and market behaviours, which can result in costly review and remediation exercises.

On the other hand, a positive culture can deliver long-term business sustainability by reducing the likelihood of issues in back books requiring remediation or regulatory intervention.

The wider commercial benefits of a positive culture include a good reputation and competitive edge, as well as greater client retention and loyalty.

What steps should firms take?
A top-down, holistic cultural assessment is the first step in understanding your internal culture, and provides a comprehensive benchmark for measuring and demonstrating the steps taken to improve it.

Assessing culture ahead of an acquisition should not just focus on whether it aligns with regulatory expectations but also whether it is broadly in line with industry peers or the culture of potential acquirers.

Having this documented will enable potential acquirers to understand to what extent your cultures are aligned and how they could be integrated if an acquisition were to take place.

Diverging cultures are not necessarily a deal breaker but will need addressing, either prior to or following the acquisition.

Without careful planning and oversight, integrating the target firm into an acquirer’s existing culture and processes may lead to compliance issues further down the line, as well as increased costs.

Andy Sutherland is managing director, advisory service, at TCC

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