Delivering value in M&A
Jose Erasun is Financial Services Sales Manager at InterSystems UK & Ireland
Building on the momentum generated in 2024 of more than 50 acquisitions, M&A consolidation is set to continue across the UK financial advice industry at pace, revealing companies that are leaner, more innovative, and data-driven. Private equity (PE) money is waiting to invest in the sector, with acquisitions focused on revenue and margin growth, and with the intention of accessing new markets and technologies to remain competitive. Easing interest rates and inflation, and the possibility of a more favourable US regulatory environment have combined with a private equity ‘dry powder’ cash pile.
Private equity investors can see that smaller financial advice businesses are struggling to invest in the technology necessary for compliance and to remain competitive. The PE aim in such consolidations is to create larger firms that leverage scale for greater efficiency and competitiveness. While data is a key enabler, the broader objective is to integrate and optimise various business functions to enhance operations, improve customer experience, and streamline regulatory compliance.
The reality, however, is that data integration problems post-merger are significantly reducing time-to-value. The complexity of integration is a serious drain on internal resources as acquiring businesses work out how to bring all this disparate data together, losing out on further opportunities while risking disruption and non-compliance.
Compliance for firms offering financial advice is eating up more time
Compliance is a major headache for many firms. In the UK, aside from GDPR and the FCA’s evolving regime of regulation, the application of the Consumer Duty Act is still unclear.
ESG, geopolitical environments, technical advances and new, emerging fintechs are all increasing regulation. The heavier reporting requirements that have accumulated over the last decade have intensified pressure on smaller firms that lack the resources to invest in advanced data technology. The smaller firms’ inability to keep pace with industry demands makes their acquisition by bigger players increasingly likely.
Firms without significant resources can also see how technology enables their larger competitors to expand into their market, investing heavily in platforms that facilitate more detailed risk-modelling and more personalised levels of customer service. They can see how larger firms are more competitive in pricing and offer more services. Companies with more advanced data capabilities are also better positioned to meet increased customer demand for up-to-the-minute information that provides greater detail.
Regulatory scrutiny is continual
As the trend for acquisition of smaller firms continues in the UK, the expansion of M&A activity has caught the attention of the Financial Conduct Authority, which has expressed public concern about the soundness of mergers. It has cautioned that it wants a renewed focus on good outcomes for the 4.4 million people paying for financial advice.
In its October 2024 letter to CEOs, the FCA reminded those at the helm of advice firms that it wants evidence of thorough due diligence, appropriate cover for liabilities, and proper integration-planning before it approves acquisitions. While in February this year, the FCA head of department, consumer investments market analysis and policy, Sara Woodroffe, said the organisation would take a close look at consolidations and report back in the summer.
The FCA is increasingly concerned about data
The FCA’s approach is to maximise the power of data across the sector to achieve greater insight, while retiring the collection of less valuable reporting data. It is concerned that customers are continuing to pay for products they no longer want or need. The organisation is concerned about retirement advice, and therefore requests that firms ‘maintain records to ensure appropriate monitoring and demonstrate they are delivering good outcomes’.
Data is a major concern. In May 2024, the FCA wrote to firms noting that closed products had gaps in customer data because of problems with legacy systems and legacy clients (back-book purchases). The regulator said advice offered must be compliant with the Consumer Duty Act that came into force in 2023. It expects firms to ensure good outcomes by filling in the data gaps to reduce any areas of vulnerability. Firms should showcase that they have ‘implemented the Duty’ and continue to remain compliant.
With Consumer Duty regulation less than clearcut in its requirements so far, firms need a consolidated overview for annual reporting. The risks of non-compliance are significant if firms have not streamlined processes or increased automation. The same challenges apply to the EU’s new Retail Investment Strategy and the US SEC’s disclosure rules. In the EU, firms must also adjust to emerging standards around the deployment of AI.
Unifying data is vital in M&A for risk management
Mergers in the financial advice sector always pose challenges in relation to unifying and analysing data from different systems. It is not only about preparing data to comply with due diligence and regulation. If a firm is to remain competitive, it must also use analytics to transform risk-management across the business, and to meet heightened expectations of customer service.
Firms need to bring all their data together, to clean and harmonise it for analysis and group-wide risk-assessment. Merged firms may, for example, share corporate customers who have been happy to use one firm for one purpose, and another with a different risk posture for a separate set of products or services. Without unified, clean and trustworthy data, it is difficult to manage such customers in a way that is efficient and compliant.
Firms need a new approach to disparate data
The difficulties in newly-merged businesses are the volume and variety of information involved, which is likely to be in separate formats and in widely different types of systems – or none at all. Often, the reality is that outdated and disparate technologies stand in the way of streamlined efficiency. Small financial advice firms may be able to get by on spreadsheets, but after acquisition this greatly hinders integration without a radically different approach.
Many consolidating firms in any case do not have the IT resources needed to achieve rapid integration of acquired businesses. An InterSystems survey of financial services professionals in the UK and Ireland found 30% admitted to difficulties in connecting data from inside and outside the organisation, resulting in inconsistent and incomplete information.
A third (33%) said disparate systems and data sources were the most challenging aspects of regulatory compliance and reporting. More than four-in-ten (43%) of those surveyed said manual data-processing held back their organisation from gaining actionable insight.
When firms merge, these poor capabilities are amplified. Legacy systems and applications with legacy databases create enormous complexity. They prevent organisations from creating clean, standardised data across the reorganised business. Approaches such as the use of data warehouses and data lakes make the harmonising of data both time-consuming and costly. The InterSystems research found two-thirds of firms employ between six and nine people to complete this task, hindering timely compliance reporting, and adding costs.
As pressure mounts for financial organisations to transform, the ability to integrate new acquisitions seamlessly will be at the forefront of growth, by increasing revenue and margin, but also accessing new markets and keeping pace with key industry players through technological advances
The three technologies required for integration after M&A
To streamline M&A activity, there a three key technologies required: integration (of diverse data sources including customer, market and operational data), data management, and analytics. The adoption of a smart data fabric can bring these technologies together, which saves a vast amount of time, which in turn creates a faster time-to-value, and is far less risky than conventional integrations. Implementing them separately (the conventional way) is usually very drawn-out and costly, with significant potential for disruption to business-as-usual.
The major difficulty is that finding data in the separate systems of merged firms and bringing it together for analytics is a real challenge when it is formatted differently and subject to divergent governance regimes. It can be uncertain whether what surfaces is wholly accurate and has not previously been adapted for a specific, long-forgotten purpose.
Risk-modelling needs unified data
Without reliable data and a single source of truth across the entire business, risk-modelling capabilities remain limited. In the InterSystems survey, 48% of respondents said improving risk management was among their priorities for compliance – way ahead of increased automation (31%).
Risk-assessment is increasingly critical in compliance, as regulators concern themselves with the risks to individual customers, and the ability of firms to cover liabilities as a result of M&A activity. In the UK, the larger a firm becomes, the greater the scrutiny from the FCA. At any time, the FCA may conduct a thematic review that could result in enforcement action if a firm is found wanting. This is similar to a sweep by the SEC in the US.
While firms are busy finding data, verifying it and placing it in a format compliant with regulators’ requirements, they are unable to focus on further acquisitions, develop product ranges, or provide new customer service propositions. How, for instance, will a firm be confident it has all the details required for reporting on meetings with individual customers who work with different businesses in the newly merged entity?
AI also needs unified data
Firms also need unified data if they are to meet aspirations for greater deployment of AI applications to streamline all aspects of their work, including on-boarding and compliance. In a 2024 PwC report, 73% of respondents in the related field of asset and wealth management said AI would be the most transformational technology in the next two-to-three years, helping drive growth.
Interactive AI advice solutions are much discussed, offering a path to more customers including what the PwC report calls the untapped ‘mass affluent’ market of people who have inherited investable assets. Yet as the report says: “Only through robust data integration can firms realise the revenue and cost-saving benefits of technologies like GenAI, including profitability analysis.”
Irrespective of AI, any merger or acquisition demands careful attention to data as it is now central to client retention and the alignment of service-provision, customer communications, and processes across expanded organisations.
Customer retention after an acquisition can be tricky, as individuals may place very significant value on their close contact with a specific adviser. That is why it is important for the new business to understand these customers quickly and personalise services accordingly.
The advantages of a smart data fabric in financial advice M&A
Firms facing these challenges after a successful merger or acquisition need to be more innovative, adopting a smart data fabric architecture to meet all their post M&A requirements and realise the full potential of the deal. The fabric is much easier to deploy than the alternatives and enables a much faster time-to-value, reducing the complexity of legacy technology stacks. It is in effect, the three technologies of integration, data management, and analytics in one solution.
It simplifies complex data infrastructures while harmonising legacy systems, without requiring replacements or lengthy IT projects. Whereas conventional technologies can take many months to deliver any results (and always come with risk as data silos are dismantled or moved) a smart data fabric can be operational in weeks.
It enhances traditional data warehouses, sitting on top of a firm’s existing infrastructure, connecting disparate data without duplication. Enabling analytical capabilities, a smart data fabric delivers one unified, trusted version from all the different data systems in the new organisation’s component businesses.
This streamlines the all-important end-to-end integration of data and applications, providing firms with the information and insight they need for compliance reporting, risk-assessment and the introduction of AI and machine learning.
Once a smart data fabric architecture is in place, the time and resources required for compliance reporting are vastly reduced. Firms find it easier to generate the necessary transparency about fees and charges, and to adapt to changing regulatory requirements and reviews.
This is an approach that delivers the centralised data governance, superior integration, and streamlined processes that expanding financial advice businesses need in an age of great opportunity and closer regulatory scrutiny.
Firms engaging in a series of acquisitions can benefit from this architecture to bring all their new businesses together under one data integration and management umbrella. This will transform compliance and enable them to fulfil their ambitions with AI, developing new services and providing an elevated level of customer experience for more tech-savvy customers.
As pressure mounts for financial organisations to transform, the ability to integrate new acquisitions seamlessly will be at the forefront of growth, by increasing revenue and margin, but also accessing new markets and keeping pace with key industry players through technological advances. By leveraging a smart data fabric, institutions will be able to reinvent businesses’ models with an accelerated and seamless integration experience of all parties’ data to ensure operations on both sides continue with the least possible disruption.
