Two decades after a change in regulation pushed banks to retrench from the wealth management sector, they are all suddenly trying very hard to get back in.
UK lenders have had a flush few years — rising interest rates have boosted profits, with structural hedges protecting banks from the worst of the impact as rates come back down again. But the impact of these hedges is expected to wane within a few years, and while there is no suggestion that lenders will struggle once this happens, shareholders’ profit expectations are high.
“UK banks have had a great run,” a challenger bank told The Banker. “But they need to do something new to maintain that momentum.”
Rumours had circulated for months that a number of high street banks were lining up to take over Evelyn Partners, one of the top five UK wealth managers by assets under management. NatWest stayed the course and last week, 10 months after it returned to full private ownership, it confirmed the purchase.
While the jury is still out as to whether the deal is a good move for NatWest (and whether it paid an appropriate price) the acquisition also raises the question of who will be next.
Banks have historically been much more involved in wealth management than they are today. The reason for their departure lies in the path regulators took in the 2010s, which prompted lenders to vastly scale down their financial advice offerings.
A series of scandals in the early noughties led to a lack of trust among consumers, prompting the predecessor of the Financial Conduct Authority — the Financial Services Authority — to change the way investment advice was regulated.
The finalisation of these rules came in 2012 with the introduction of the Retail Distribution Review which banned product providers from paying commissions to advisers, mandated a higher level of qualifications for advisers, and generally enhanced clarity for consumers about what they were paying for.
The timing could not have been worse for banks, who had been recently burned by the PPI mis-selling scandal. Concerned about the ramifications of another mis-selling scandal, they retrenched from wealth management en masse, leaving a thriving independent financial adviser (IFA) sector in their stead.
The success of these IFAs was turbocharged in 2016 by the introduction of “pension freedoms” by the Conservative government, which allowed defined contribution pension scheme holders to take out a 25 per cent tax-free lump sum as well as getting rid of the requirement for pension holders to buy an annuity, sending the demand for financial advice soaring.
The sector continues to thrive and is awash with private investment; there are an estimated 40 private-equity backed IFA firms in the UK.
But banks until recently have remained hesitant to re-enter the market, not least because of another regulatory crackdown on the wealth management space in 2023, this time targeting some of the UK’s biggest advice providers, such as St James’s Place.
Yet regulators and the government have performed a remarkable volte-face on treatment of wealth managers in the three years since then. Ben Bathurst, an analyst at RBC Capital Markets, attributes the shift to the acknowledgment of an “advice gap”: the difference between those who receive financial advice and those who want it.
About £650bn of UK savers’ money is currently sitting in low- or no-interest accounts, according to RiseUp, a £200bn jump from 2022. Just 9 per cent of UK adults took financial advice last year, according to a recent survey by the FCA. 20 per cent of those surveyed indicated they would like advice but were overwhelmed by the options available or needed more support in order to invest.
“There has been a fundamental shift in the way government and the regulator is thinking about how retail customers access financial investments; the background here is the acknowledgment [. . .] that not enough people are taking advice as it is currently defined,” Bathurst said recently on a podcast.
That realisation has prompted the development of “targeted support” (see Provision Tracker) — new regulations on their way from the Financial Conduct Authority that soften the definition of what constitutes financial advice. The regulations, due to come into effect in April, pave the way for banks, wealth managers, insurers and investment platforms to make product suggestions or a course of action for customers, without the companies having to adhere to costly regulations.
Meanwhile, as high street banks in the UK search for new sources of income, they find themselves well placed to make acquisitions — they are currently trading at around 1.5 times tangible book equity, indicating high resilience and relatively little leverage.
Add to that the issue of the advice gap, and many lenders see getting into wealth management as a no-brainer. The sector is capital light, revenues are sticky, and it continues to benefit and grow from the changing demographics of older, wealthier people in the UK.
Moreover, while banks are well placed to funnel current customers into wealth management offerings, they currently do not employ enough financial advisers to benefit fully from this.
“Bankers believe not only is [filling the advice gap] in the interests of society in general, it helps their P&L,” says a banking strategy consultant.
For NatWest in particular, Evelyn fills a clear gap in its proposition between the retail customers and the ultra-wealthy customers Coutts deals with. However the announcement of the acquisition of February 9 went down badly with the markets; the bank’s shares fell 6 per cent on the day, which many said was due to the price of the deal.
NatWest paid £2.7bn for Evelyn Partners, representing a price to AUM ratio of 3.9 per cent. This is relatively expensive compared to RBC’s takeover of Brewin Dolphin in 2022, which valued the latter at 2.8 per cent of AUM, and CVC Capital Partners’ takeover of investment platform Hargreaves Lansdown in 2024 at 3.5 per cent of AUM.
The strategic rationale for the deal is “obvious”, says Jonathan Pierce, analyst at Jefferies, “[but the] financial maths [is] arguably less compelling”.
While the £750mn share buyback NatWest announced at the same time confirms its balance sheet strength, the cost of the deal will reduce NatWest’s common equity Tier 1 ratio by 130 basis points. “[This] risks a portion of the £3.8bn of repurchases baked into 2026 to 2027 consensus,” says Tomasz Noetzel, a senior industry analyst at Bloomberg Intelligence.
But the share price reaction was also influenced by a wider sell-off of bank stocks overall, due to rising concerns over government instability. They came as Prime Minister Sir Keir Starmer’s top aide dramatically quit over the appointment of Lord Peter Mandelson as ambassador to Washington and the latter’s involvement with Jeffrey Epstein.
The uncertainty over whether Starmer would ride out the storm weighed on lenders’ valuations, as fears grew that he would be ousted in favour of a more left-leaning, tax-heavy leadership.
But this reaction is overdone, says Pierce. “On the one hand, there is likely more of this to come. But on the assumption that bond markets contain the tax and spend ambitions of this or any future Labour leadership, bank profitability is unlikely to be unduly impacted by what we are seeing.”
Attention will now turn to the rest of the banking and wealth management industry to judge who will be next.
It is no secret that a number of other UK high street banks are trying to increase their wealth management offerings, and an acquisition is seen as a more efficient and effective way to do this than by building it out organically.
Lloyds has already bulked out its wealth management offering, acquiring digital wallet and fintech provider Curve in November last year, as well as taking over a joint venture in financial planning and wealth management it launched with Schroders.
Lloyds could be going further. Bloomberg recently reported that the bank was among a number of bidders for the UK arm of Dutch insurance company Aegon, which offers pensions and investment services.
Barclays may also be in the running for an acquisition — it was reported to be among the bidders for Evelyn, coming soon after it also missed out on acquiring TSB from Banco Sabadell, which was eventually bought by Santander.
“NatWest’s acquisition of Evelyn Partners represents a missed opportunity for Barclays,” says Max Harper, analyst at Third Bridge. “Our experts continue to highlight the bank’s relatively weak UK wealth proposition as an area where a bold move could have driven rapid growth.”
HSBC is less likely to be on the hunt for wealth managers to buy, as it has a fairly well-established private bank, and recently brought its retail, wealth and private banking offerings under one organisation.
Ultimately for NatWest, despite the high price it paid, the acquisition makes sense, says Benjamin Toms, analyst at RBC Capital Markets.
“Whilst the Evelyn Partners transaction screens as being a little expensive on some measures [. . .] we do see it as being transformational and filling the gap that NatWest has in its affluent wealth offering.”
