The FCA has warned that it will intervene on the sale of client banks if selling firms fail to make clear any redress liabilities. 

With the rapid rise in recent years in M&A activity in the Financial Planning and wealth management sectors, it has become common for client banks, often including many hundreds or thousands of clients, to be transferred to acquiring companies.

In some cases the client bank lists have included clients who were mis-sold or badly advised and have redress or compensation liabilities, causing headaches for acquiring companies and issues for the regulator.

The FCA said that there was evidence in a small number of cases that, “firms have sold a client bank when they either knew they had redress liabilities or had failed to detect them.”

The FCA will insist that firms are “open and honest, act in good faith and avoid causing forseeable harm” when buying and selling client banks.

The FCA has warned it may take action:

• Where a firm is trying to sell its client bank in a deliberate move to avoid any redress liabilities which have arisen or may arise 

• Where a firm attempts to compromise with its customers by offering less than the full redress value owed 

• Where a client bank is transferred to a holding company or where an adviser/appointed representative agreement is altered to state clients are not owned by the firm 

• Where a firm might be seeking to ‘lifeboat’ and sell its client bank below market value to another firm, or where no consideration has been given to requesting an independent valuation of the client bank – and subsequently the selling firm's staff and directors move to the purchasing firm. 

The FCA warned: “We will investigate either firms and/or individuals closely associated with firms we suspect are structuring their business in a way that avoids their liabilities.”

Failure to disclose any liabilities is not acceptable, says the FCA, which warned it would act when lists are being sold with redress liabilities.

The FCA set out its warning that it would act and what it expected in a statement yesterday. It accepted that the client bank was the firm’s asset and could be sold or transferred.

Sale of the client bank may include all clients a selling firm has worked with in the past and may include a right to income streams.  

The FCA said because of the issues found it plans to step up its monitoring of clients banks that are sold or transferred.

The regulator said it accepted that client banks can be sold for legitimate reasons – for example, to merge with another firm or so that an adviser can retire.  

However, firms selling a client bank must comply with existing FCA principles and rules and take account of relevant guidance. Under the Consumer Duty, firms must act to deliver good outcomes for their retail customers, the FCA reiterated.  

The watchdog said, as set out in framework (FG20/1) for assessing adequate financial resources, it expects firms to assess and set aside “adequate financial resources” to meet any potential redress liabilities.  

In November 2022, the FCA also reminded firms that firm failure and phoenixing remain key areas of focus in the financial advice sector.

The FCA said it expects a firm intending to sell its client bank to notify the FCA via a SUP 15 notification where the sale could affect the firm’s risk profile, value or resources.

It also wants firms selling client banks to carry out due diligence to ensure the firm buying the client bank can provide the same level of service - for example, ongoing servicing. 

Firms buying client banks must also provide newly acquired customers with a written basic agreement. The FCA may also ask a firm selling its client bank to agree to some of the following measures: 

• A voluntary asset retention requirement to ensure that the firm retains its client bank and other financial resources for potential redress. For example, where the firm has a large defined benefit transfer back book and a history of complaints 

• Where a selling firm wishes to leave the market, an undertaking or attestation to maintain an increased level of capital until the firm has applied for cancellation of their permissions, and this has been approved by the FCA 

The FCA may also ask firms purchasing a client bank to add a voluntary requirement to restrict those closely associated with the selling firm from receiving a benefit from the sale of the client bank or the use of the client bank at the purchasing firm.