You are CEO of a wealth management firm, and your expansion plans include potential acquisition of similar firms. A new opportunity has come forward to acquire a mortgage intermediary (staff, premises, customers, operational systems). Over the years you have referred mortgage work to third parties, however, having conducted a commercial review of this mortgage entity, aligned with your customer base, you feel this acquisition will bring benefits to the growth of your firm. You have undertaken commercial due diligence and are assured of the commercial benefits that the acquisition will bring.
Your risk and compliance officer has raised a concern regarding the acquisition, and the potential regulatory risks that it may bring. The risk & compliance officer has asked that you engage an external party to assess the potential regulatory risks of the acquisition.
You have made contact with a number of third parties to conduct the review but are unsure of what their work should cover.
A few of the key factors to consider are:
Culture & ethical frameworks
It is important that the culture prevalent in the acquired entity is aligned to the culture you have established in your firm. Culture drives behaviours and so it is imperative that an assessment of this area is made. This will enable you to understand whether the target firm can wholly and successfully integrate with your firm.
How a business has been governed can be an indicator of the quality of the business previously written and the approach to regulatory compliance. A third party should review the governance arrangements in place, together with an assessment of the approved persons in place, particularly in relation to whether they have the skill set to robustly manage their areas of responsibility in a new environment.
Whilst every piece of business written cannot be reviewed, it is imperative that the third party builds an element of sample testing to help assess the level of conduct issues that may be present. The third party should select a risk based sample of business for review, and the review should also encompass an assessment of sales practices.
On paper the potential acquisition is very appealing; however, you must ensure that there are no legacy business lines / entities that may be transferred upon purchase or that will need excluding in any purchase agreement that cannot be managed. Therefore, the third party must structure a means of ascertaining whether legacy issues may be present, and if so how to assess any potential liability which would be transferred. The legacy issues impact not only commercially, but also from a regulatory and reputational stance.
Staff and supervision
The purchase would involve a transfer of staff and so you need to ensure that the group of people you are merging into your business have the requisite skills and knowledge. So some means of assessing this should be developed and reviewed. As part of this you should also assess their views of how to treat customers and their desire to ‘do the right thing’. Furthermore as you will be bringing a new line of regulated business into the firm you need to assess the capability and competence within your firm to supervise this new activity.
During the initial negotiations you have received a large volume of what initially looks like useful management information covering issues such as revenues, growth projections, complaints levels, customer feedback, quality metrics and staff retention rates. Whilst this seems very impressive, you must instruct your third party to ‘unpick’ this data to ascertain the ‘real story’, including how the information was used by the target firm to improve its processes, customer proposition and staff behaviours.
Understandably, your risk and compliance function has raised concerns regarding how they will manage the workload. You need to ask your risk and compliance function to assess any skills gaps, the additional monitoring work required and how the new business will impact on your current business risk assessment.
Simon Collins is managing director at RGP Compliance