Britain’s financial watchdog has urged wealth managers and financial-advice consolidators to tighten controls over debt, governance and integration, warning that poorly managed expansion could harm clients and strain the financial system.

In a review published on Thursday, the Financial Conduct Authority (FCA) said the surge in mergers and acquisitions across the financial-advice and discretionary-management sector had created both efficiencies and new vulnerabilities. The regulator examined groups buying up independent financial advisers (IFAs) and wealth managers, looking at how they handle leverage, group structures, and post-acquisition integration.

The FCA said consolidation “can support efficiency and sustainable growth” when done properly. But the watchdog cautioned that rapid expansion, if not backed by sound financing and oversight, “could lead to poor outcomes for consumers, employees and the wider financial system.”

Debt and “double leverage” in focus

The review highlighted growing reliance on debt to fund acquisitions, including structures where regulated subsidiaries effectively guarantee parent-company loans — arrangements that can expose clients to credit risk if the group falters. The FCA said some holding companies used “double leverage,” borrowing to fund equity stakes in regulated entities and then relying on those same entities’ cash flow to service the debt.

That practice, the regulator warned, could weaken resilience and push firms toward short-term refinancing cycles. Some groups were found to have limited stress testing and balance sheets dependent on goodwill rather than tangible capital.

Better-run consolidators, by contrast, closely monitored group-level borrowing, avoided pledging regulated assets as collateral, and kept regulated subsidiaries insulated from the parent’s credit exposure.

Governance gaps and group risk oversight

The FCA found a mixed picture on governance. Firms with clear organisational charts, strong boards and regular monitoring of group-wide risks were “better placed to deliver sustainable growth,” the review said. But in other cases, decision-making sat with unregulated parent companies, leaving regulated firms with little independent oversight or challenge.

In some groups, the regulator noted, growth outpaced the development of internal systems and controls. “Some groups did not scale systems and controls in line with their growth,” the report said, adding that weak management information had led to “poorly controlled growth.”

The FCA said boards must ensure risk and compliance functions keep pace with expansion, and that senior managers have the expertise to manage complex, multi-entity structures. It also called for more independent directors to provide “unbiased scrutiny” at group and committee levels.

The watchdog praised firms that invested in due diligence and integration teams before and after acquisitions. Those groups typically used third-party reviewers, ran detailed assessments of client books and staff capabilities, and drew up tailored integration plans.

Others, however, were less disciplined — relying on “tick-box” due diligence or overlooking legacy compliance issues. In such cases, the FCA said, acquirers later faced “substantial further investment” to fix inherited problems.

Firms that treated acquisitions as long-term partnerships rather than quick scale plays tended to perform better. They had defined cultural and client-retention goals and devoted resources to aligning systems and service quality across acquired firms.

Managing conflicts of interest

The FCA also scrutinised potential conflicts within vertically integrated groups that both advise clients and sell in-house investment products. It said some acquirers offered incentives that risked steering clients into proprietary funds, against the regulator’s “Principles for Business.”

Good-practice examples included firms that offered advisers no product-linked incentives and maintained a broad range of third-party investment options monitored for suitability.

Some consolidators had routed acquisitions through offshore holding companies — a tactic that can reduce the scope of UK prudential-consolidation rules. The FCA said such arrangements “may undermine financial resilience” and complicate supervision, since the risk to UK clients remains unchanged even if the parent is domiciled abroad.

The regulator reminded firms that goodwill booked from acquisitions has “limited realisable value during stress” and should not be relied on for solvency calculations.

FCA’s message: tighten, test, and plan

The review stops short of introducing new rules, but it serves as a warning to fast-growing consolidators and their investors. Firms are expected to benchmark their own governance, capital structures and integration processes against the FCA’s findings.

The regulator said the goal is to ensure consolidation supports innovation and succession in the advice market — particularly as older IFAs retire — without compromising stability or client outcomes.

“Careful consideration of our findings should help firms ensure a smooth and efficient process when looking to apply for a change in control,” the FCA said.