M&G vs Royal London: A Case Study in Risk Management and Due Diligence Failures

The lawsuit between M&G and Royal London has sent ripples through the financial services industry. The £27 million claim hinges on allegations that Royal London failed to disclose exposure to "inappropriately risky investments" in its Ascentric platform prior to its sale in 2020. This legal battle not only spotlights critical issues in due diligence during acquisitions but also raises broader questions about risk management, regulatory oversight, and the ethical responsibilities of financial service providers.

Context: A Strategic Acquisition Goes Awry

M&G's 2020 acquisition of Ascentric was part of its broader strategy to penetrate the retail savings market, leveraging Ascentric's £15.5 billion in assets under administration. However, M&G now claims that Ascentric's Investment Funds Direct Limited (IFDL) platform offered risky CFB Bonds, which were illiquid and lacked a secondary market. Such products, allegedly marketed as "minibonds," have long been scrutinised for their speculative nature and potential to cause significant client detriment.

Regulators such as the Financial Ombudsman Service (FOS) have already pointed out that better due diligence by Ascentric could have flagged the speculative nature of these bonds. Allegations that some advisers allocated 30% or more of client portfolios to these risky assets further exacerbate the situation, potentially breaching principles of suitability under the FCA's Conduct of Business Sourcebook (COBS).

A Failure of Risk Management?

This situation underscores the systemic risks posed by weak oversight mechanisms in financial platforms. Several issues stand out:

1. Due Diligence Deficiencies:

   M&G's claims suggest that Royal London either failed to disclose, or inadequately assessed, the risks associated with CFB Bonds. In private equity and asset management deals, comprehensive due diligence is essential—not only to appraise financial value but also to identify contingent liabilities. Here, M&G’s assertion that material risks were concealed could set a significant precedent for disclosure standards in M&A transactions.

2. Product Governance Risks:

   The CFB Bonds in question fall under the umbrella of non-standard investments, which are often high-risk and illiquid. Such products demand stricter governance under frameworks like the Product Intervention and Product Governance Sourcebook (PROD). The apparent lack of appropriate due diligence by Ascentric highlights gaps in regulatory compliance and internal risk controls.

3. Regulatory Fallout:

   The Financial Conduct Authority (FCA) has expressed increasing concern over firms marketing non-standard assets without adequate client safeguards. The risk of FCA enforcement actions could be significant, especially if M&G is forced to establish a remediation scheme. This underscores the importance of anticipating regulatory scrutiny in post-acquisition integration strategies.

Implications for the Industry

The financial sector, especially in the UK, is at a crossroads where regulatory expectations are rising amid a complex investment landscape. This case could have far-reaching consequences:

• Heightened Due Diligence Standards:

  Firms engaging in acquisitions may be forced to strengthen their due diligence processes, particularly around client portfolios and product governance. The risk of post-deal liabilities could outweigh short-term strategic gains.

• Enhanced Scrutiny of Minibonds and Illiquid Assets:

  Products like minibonds have repeatedly drawn regulatory attention, with previous scandals (e.g., London Capital & Finance collapse) leading to tighter rules. This lawsuit is another stark reminder for platforms to reassess their product offerings against client suitability.

• Investor Confidence in Wealth Platforms:

  Wealth platforms must prioritise transparency and risk management to maintain trust. Allegations like those faced by Ascentric could damage the reputation of wealth management platforms across the board.

MY ANALYSIS: A Case for Holistic Risk Management

In my opinion, this lawsuit highlights a critical oversight in the financial services industry: the underestimation of contingent risks during acquisitions. While strategic acquisitions are central to scaling operations, M&G’s experience underscores the dangers of inheriting poorly managed platforms.

From an investment perspective, this incident reinforces the importance of enterprise risk management (ERM) in wealth platforms. The lack of a liquid market for CFB Bonds and their apparent over-representation in client portfolios suggest failures at multiple levels—product governance, client suitability assessments, and platform oversight. This trifecta of failures could result in significant financial and reputational damage, not just for M&G but for the industry at large.

As the FCA continues to push for stricter consumer protections, firms must proactively strengthen their governance frameworks. For investors evaluating companies like M&G or Royal London, this situation serves as a reminder to scrutinise their operational resilience and risk management practices.

Conclusion

The legal battle between M&G and Royal London is more than just a contract dispute; it is a cautionary tale for the financial services industry. Firms must balance growth ambitions with robust risk oversight, especially in today’s complex regulatory environment. For M&G, the next steps will likely involve navigating both legal proceedings and FCA expectations, underscoring the high stakes of ensuring compliance and client trust in wealth management.