Rathbones Group (RAT) shares have been hammered this month, falling from 1,952p to around 1,610p after the wealth manager disclosed a Financial Conduct Authority-prompted review into its UK Wealth Management business.
The drop wiped close to £300m off the group’s market capitalisation in a single session, leaving the shares at a 52-week low of 1,582p as of 19 June, against a 52-week high of 2,500p reached in February.
The trigger was a skilled person review that found shortcomings in how Rathbones implements Consumer Duty rules, alongside weaknesses in compliance and oversight, which will cost the firm £60m over two years to fix while it pauses onboarding of enhanced due diligence clients for up to 12 months.
A flow problem, not a balance sheet one
Enhanced due diligence clients generated £370m of gross inflows over the past year, with a further £530m frozen from existing higher-risk accounts, but combined that is under £1bn against funds under management and administration of £113.6bn at the end of Q1, which makes this a flow problem rather than a balance sheet one.
Operating income actually grew 9.4% year-on-year in the first quarter to £240.7m, beating consensus by around 1%, even as net outflows of £0.8bn continued, with much of that outflow reflecting tax-driven withdrawals tied to the October 2024 Budget rather than client defections from the regulatory issue.
The dividend policy is unchanged, and the previously announced £20m share buyback has now received Prudential Regulation Authority approval and will proceed, which is not the behaviour of a board worried about solvency.
Insiders are buying the dip
Chief executive Jonathan Sorrell bought 15,320 shares at 1,630p on 16 June, a stake worth almost £250,000, while chair Clive Bannister bought a similar amount on the same day and a non-executive director has since followed with further purchases, suggesting those closest to the regulatory detail see the sell-off as overdone.
The shares trade on a trailing price-to-earnings ratio of around 15 times, with a dividend yield that has risen to roughly 6% following the price fall, a meaningfully higher yield than Rathbones has offered for most of the past two years, and one that comes alongside a maintained payout commitment.
Where the analysts disagree
Panmure Liberum upgraded the stock from Hold to Buy, and RBC Capital Markets retained an Outperform rating, albeit trimming its target from 2,400p to 1,950p, which still implies more than 20% upside from current levels.
Jefferies has gone the other way, restating an Underperform rating with a 1,780p target, arguing the remediation costs and reputational hit could weigh longer than management suggests, and that view has merit worth weighing.
A two-year remediation programme creates ongoing management distraction at a business already trying to reverse outflows under a CEO who only took charge last August, and further client losses beyond the EDD cohort cannot be ruled out if the targeted client review into past outcomes turns up additional problems.
Peel Hunt’s suggestion that these issues predate the current management team is plausible given the timing, but plausible is not proven, and the FCA’s own commentary points to a wider sector-level due diligence crackdown that could resurface at other wealth managers too.
Weighing it up, the scale of the financial impact looks contained relative to the size of the share price reaction, the dividend and buyback remain intact, and those with the best visibility into the regulatory detail have been buying rather than selling. The risk-reward profile looks more attractive than the headline 19% fall might suggest.