The challenge
In any acquisition it is vital that the acquiring company understands precisely what regulatory risk the proposed purchase could entail. Thistle Initiatives frequently undertakes acquisition due diligence work on FCA regulated target firms to help prospective acquirers understand just that.
On this occasion Thistle Initiatives was approached by a large IFA firm to carry out compliance due diligence on another smaller IFA business it was looking to acquire.
The prospective buyer was already aware of Thistle Initiatives as a compliance services provider with extensive experience in the investments and IFA space. It was also aware that we have a long track record of assisting UK regulated firms with acquisition projects. Since Thistle Initiatives was established in 2012, we have carried out regulatory due diligence on hundreds of FCA regulated businesses.
Once the buyer had engaged Thistle Initiatives and introduced our team to the target firm, and the relevant non-disclosure documents had been signed, we set about requesting and reviewing a sample of the target’s client files, in particular, those involving pensions advice, to form a high-level view on how it did business. Finding no serious cause for concern, we submitted a cautiously positive initial report to the buyer.
Based on this, the buyer instructed Thistle Initiatives to proceed to a comprehensive compliance due diligence review of the firm’s regulated activities.
The solution
We requested data and documentation across a wide range of areas, including its compliance monitoring plan, policies and procedures, wider systems and controls and its regulatory correspondence.
Amongst other things, we audited the target firm’s internal governance and its systems and controls against what the FCA currently expects. We also looked at its technology governance and systems and controls and how well these reflected the regulator’s current expectations - particularly in terms of any vulnerability to financial or cybercrime.
We mapped the activities the firm carried out against its regulatory permissions, verified all returns made to the FCA and the firm’s compliance with Prudential Regulation, and reviewed the responsibilities and roles for all those in Senior Management Functions roles as defined in the Senior Managers and Certification Regime (SM&CR).
Following this initial compliance due diligence exercise, we requested additional documentation in a number of areas where we had queries or concerns. Our compliance experts also conducted interview meetings (virtually, due to the Covid-19 pandemic currently affecting the UK) with senior managers and certification staff to find out more about certain aspects of the target firm’s practices and operations.
Having gathered, assimilated and assessed this additional information, Thistle Initaitves' acquisition due diligence team then presented its findings to the buyer in the form of a red-green-amber (RAG) report, with detailed accompanying commentary, indicating our experts’ view on the target firm’s compliance status, both in aggregate and across multiple specific activities.
On the basis of Thistle Initaitves' RAG report, the buyer recognised that there were a number of areas in which the target firm’s compliance standards needed some attention but was reassured by what we had found in other areas. As a result, it decided to move ahead with the acquisition.
As part of the sale process, Thistle Initiatives was then engaged to carry out a multi-strand implementation project to address the various shortcomings in the target firm’s compliance profile that had been identified in the course of the acquisition due diligence exercise.
The result
The result was that the acquiring company was able to complete the purchase - with further assistance from Thistle Initiatives on its FCA Change of Control application - well within its target timescales, secure in the knowledge that it would be unlikely to encounter any unexpected compliance issues or liabilities once the deal had been concluded.
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