A recent report by Deloittes suggested the North-East could see a large increase in M&A activity in the very recent future: below an expert from law firm Ashfords LLP calls on his experience to delve into the claim further
Earlier this month we noted an article from Deloittes predicting high, and indeed increasing, levels of M&A activity within the UK financial services industry both nationally and notably in Yorkshire and the North East of England.
I have noted the same and can bear witness in support of the trends identified and the reasons behind them as identified in the article published by Deloittes.
Recent Experience
Our most recent and immediate involvement that bears on this issue was in relation to advising on the £6bn merger of our client Family Assurance Friendly Society Limited with Home Owners Friendly Society Limited, better known as Engage Mutual. Engage Mutual, based in Harrogate is a substantial mutual insurance group and this merger consolidates Family Assurance’s position as the second largest friendly society. The transaction remains subject to regulatory approvals in the UK and across the EU but it does appear that, following favourable votes from the memberships of both mutual insurers involved, all is on course for it to close in April. The merger found favour with the two mutual insurance groups’ executives and memberships and, most notably, with the regulatory authorities for a number of reasons all of which fit squarely within the trends identified by Deloittes.
Trends Involved
1.Consolidation: The mutual sector generally, and the friendly society sector in particular, has long been recognised as an area ready for and actually in need of consolidation. Mutual building societies have been the subject of much consolidation driven M&A activity over the 1990s and 2000s and the remaining parts of the mutual sector are now in the mainstream. This consolidation has been acknowledged as a developing feature of regional financial services businesses and those located in the North East in particular. Merged financial services businesses, especially the more institutional, can typically maximise the synergistic benefits of size through, at least, improved distribution and product diversification, as well as achieving cost reductions through economies of scale (producing sometimes substantial savings in business support areas such as finance & accounting, compliance, HR and even marketing & PR).
2.Regulatory: The advent of a new regulatory regime in April 2013 (the so-called “twin peaks” of the Prudential Regulatory Authority or PRA and the Financial Conduct Authority or FCA in lieu of the former single regulator, the Financial Services Authority) has without doubt brought with it a more stringent and, of particular note, more proactive regulatory approach to the operations of regulated firms. Many will have witnessed the new regulatory authorities encouraging activities that are perceived to have demonstrable investor benefit and that extends to M&A transactions. Such investor benefit can take the form of some or all of the consolidation benefits mentioned above and can extend to cultural or management reform. In addition, as has been noted, the assumption of consumer credit regulation by the FCA in April 2014 has increased the compliance burden in that area dramatically (from the bygone days of the Office of Fair Trading or OFT) and this also has generated M&A pressures.
3.Solvency II: The, already much delayed, implementation of the new regulatory capital requirements regime to be applicable to financial services firms under the EU directive known as “Solvency II” from the end of the current calendar year is seen as a strong driver for M&A activity in the sector. The additional cost of conducting “investment business” resulting from Solvency II, which adopts a much more clearly defined risk-based approach to regulatory capital, is disproportionate amongst the smaller firms and institutions such that larger firms (with greater risk management and financial resources to hand) are better placed to control and limit increased capital requirements by leveraging off their larger scale.
Conclusion
Regional financial services sector businesses in general are experiencing a number of pressures driving them towards M&A activity. Those pressures range from the recent enhanced regulatory focus (both as to the depth of regulator scrutiny and its greater breadth as well) to the financial burden of increased regulatory capital requirements. Not all financial services firms will feel these pressures in the same way and some won’t feel them at all but there is definitely a trend developing that can be expected to increase through 2015. The North East and Yorkshire particularly exemplify these trends towards consolidation in the sector.
