Navigating Financial Services M&A: Observations from Regulatory Due Diligence | Venable LLP

As we move into 2025, anticipation in the financial services industry continues to build for a revitalized mergers and acquisitions (M&A) market. The financial services landscape will likely undergo significant changes under the new presidential administration, bringing both opportunities and challenges for venture capital, private equity, and other investors that are exploring opportunities in banking, payments, lending, and fintech.

Transactions in the financial services industry typically involve companies or financial products that are highly regulated and subject to federal and state supervision or structured to fit within legal exemptions. Investors must consider unique challenges related to regulatory compliance and potential regulatory notices and approvals, in addition to typical deal considerations. An ill-conceived or poorly executed acquisition may result in financial loss, business disruption, and regulatory risk. The following outlines recent developments that offer valuable lessons for prospective buyers and investors, particularly regarding due diligence, regulatory risks, and post-transaction integration.

Observations from Recent Deals

1. Enhanced Regulatory Scrutiny: Regulatory agencies, including state financial services regulators, and state attorneys general are increasing their focus on M&A activity and have various connections to the relevant laws and regulations— and this refers not just to the CFPB. Buyers should conduct comprehensive due diligence to identify potential compliance risks and liabilities. The statute of limitations under some consumer protection and financial services laws can mean that regulators and private litigants may be able to bring a claim several years later.

2. The Importance of Consumer Complaints: Don’t ignore the role of consumer complaints in revealing potential systemic compliance weaknesses. A robust review of complaints and understanding their origin in relation to relevant regulatory requirements can be helpful for assessing risk in ways that standard diligence could gloss over.

3. State Licensing Complexities: Licensing and compliance with state-specific regulations (e.g., money transmission, debt collection, mortgage, sales finance, credit reporting, consumer lending) remain key and could be potential strengths or sources of compliance gaps. Buyers should review targets to understand if they are licensed and compliant, including with supervisory reports of examination, and understand the importance of statutory exemptions and vendor relationships, to avoid inheriting liabilities. Additionally, navigating state licensing laws for financial services often involves addressing changes of control resulting from acquisitions. Depending on the specifics of a transaction, these laws may require regulatory approval for both direct and, in some cases, indirect ownership changes necessitating careful consideration of application requirements, post-closing ownership structure, and relevant regulatory expectations before finalization of the transaction.

4. Future-Proofing Business Models: With evolving regulations, buyers should evaluate targets’ readiness to adapt to regulatory changes, including potential deregulation or enhanced supervision by state or federal regulators, and potential litigation risks (arising from actions by regulatory agencies and private actions by consumers).

5. Start Early: Initiating regulatory diligence early in the deal process can help avoid hiccups and provide insight. For example, state licensing requirements, change of control approvals, and other regulatory obligations can impact the timeline and even the structure of a deal. Identifying these issues early not only helps avoid delays but also provides some insights into the target’s compliance history, ongoing obligations, and future growth potential. Moreover, regulatory considerations can influence valuations, financial projections, identifying investors, and integration strategies, making early diligence a factor in aligning expectations and helping maximize long-term value.

By incorporating these lessons into M&A regulatory due diligence, investors and buyers can help mitigate risks and position themselves for success in the dynamic consumer financial services sector.

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