Compliance-related mergers and acquisitions, often reported on in our web-pages, are on the rise. Institutional investors are interested in compliance consultancies because the barriers to entry at the top end of the market are high and the consulting sector is benefiting because the ever-more complex demands of regulators are creating a market for fragmentary help.

Regulation in the world of business often behaves a little like a swinging pendulum. Long periods of tightening regulation, fresh legislation and active enforcement are often followed swiftly by equally long periods of deregulation, de-legislation and laissez-faire administration, before the pendulum swings back once again.

Since the global financial crisis began, however, the trend in regulation has only been heading in one direction: upwards. The result is an increasingly stringent regulatory implementation agenda for the corporate world – a situation which is intensified further by a technological flux and some rapid evolution in the expectations of high net worth consumers to accompany it. This is having a profound effect on mergers and acquisitions in the financial sector.

What the regulator hath wrought

The UK’s Financial Conduct Authority published its Business Plan in April. Armed with a budget of £543.9 million, which is 3.2% higher than that of the previous year, the regulator took the opportunity to say that it was moving its spotlight squarely onto the underlying corporate culture and governance of financial institutions, as well as onto new global risks, in particular cyber-security. Historical issues such as the mis-selling of payment protection insurance will soon recede into the background.
 
The authority wrote: “[Our] priorities are fairness, access and value for retail customers, and an effectively functioning wholesale market. Within this sector, the key drivers of harm include [the] suitability of products, renewal pricing, mis-selling, low-value products, operational resilience and cyber-crime.”

There is so much regulation and risk present in the sector that compliance is fast becoming a top priority for boards and senior managers. Regulatory compliance comes with a hefty price tag. The average annual expenditure on it by a typical large British bank is an eye-watering £3.3 billion. Even a mid-sized bank spends on average £1.1 billion on professional service fees in a year.

For firms that want to dodge responsibility, non-compliance can be even more costly. To date, banks and insurance companies have paid out £30 billion in compensation to victims of their mis-selling, with an estimated £18 billion still to come. While financial institutions are shouldering an ever-heavier regulatory burden in terms of man-hours and money, regulators are imposing increasingly complex remedial regimes upon them. In response, firms have had to look for external support and where there is risk, there is opportunity.

The winners

The main winners from this wave of outsourcing have been the specialist compliance consultancies that offer tailored and outsourced services and software, along with access to technical skills, expertise and people. They are well-equipped to do the more technical jobs that come with implementation programmes and continual support services. They provide a crucial service to a growing client base with neither the technical expertise nor the manpower to satisfy its increasingly complex compliance-related needs. This is especially true when they have broken the rules and are facing the wrath of the regulators.

Some of the highlights

As a consequence of all this, there are high barriers to entry to the world of compliance consultancy and general support. Such barriers attract institutional investors and corporate acquirers alike and the number of mergers, acquisitions and other ownership-changing transactions has sky-rocketed. Here are some of the highlights.

• European Capital acquired a majority stake in Cordium, a UK-based regulatory compliance consultancy, for a consideration of £100 million in 2014. In the last few days it has sold Cordium on to ACA Compliance Group, an American provider of regulatory compliance products.
• In March this year, Duff and Phelps acquired Kroll, the US-based risk consultancy, for an undisclosed sum.
• In 2016, Dunedin invested in Alpha, an asset and wealth management consultancy which opened a dedicated London compliance practice in that same year under ex-FCA manager Andrew Glessing, and went on to 'IPO' the business successfully in October last year after an 18-month investment, generating a 2.1-fold return.
• In 2014, BGF invested in the Consulting Consortium, a multiple-award-winning regulatory and compliance consultancy with an exciting suite of fraud prevention software packages.
• In 2017, a 'growth investor' called Livingbridge invested in Catalyst Development (advised by Livingstone), the IT consultancy that concentrates on governance and regulatory change at large financial institutions.

The outlook for compliance-related M&A activity is bright; the outlook for regulated financial firms' compliance-related costs less so.

* Karen Dawaf Harron can be reached on +44 (0)20 7484 4730 or at dawaf@livingstonepartners.co.uk