The Competition and Markets Authority (CMA) has published its final report into the investment consultancy and the fiduciary management markets following its market investigation. This follows a September 2017 reference made by the Financial Conduct Authority (FCA). The final report has found an adverse effect on competition in these markets and has proposed remedies to address the deficiencies identified. The CMA has also made a number of recommendations to regulators, perhaps the most notable of which is a recommendation to the FCA to extend its regulatory perimeter to include all the main activities of investment consultants.
Background
Pension scheme trustees are required by law to "obtain and consider proper advice" before investing. Investment consultants advise pension trustees, who oversee companies’ pension schemes, on how to invest their funds. Investment consultants are said to influence assets totalling £1.6 trillion. Pension scheme trustees have significant assets to invest but many schemes have a large funding gap with liabilities exceeding their assets.
The CMA usually conducts market investigations to determine whether any feature (or any combination of features) of a market prevents, restricts or distorts competition in connection with the supply or acquisition of any goods or services in the UK. Where the CMA finds any adverse effect on competition, it is required to consider whether remedial action should be taken and, if so, what measures would be effective and proportionate.
The FCA launched a market study into the workings of the asset management sector in November 2015, and published its final report in June 2017. That report found significant differences in both the behaviour and outcomes of different institutional investors, with large institutional investors enjoying greater bargaining power than smaller institutional investors, namely pension funds. The latter rely more on investment consultants when making decisions. Concerns identified by the FCA in the investment consulting market include: the high and stable market shares of the three largest providers; a weak demand side; relatively low switching levels; and conflicts of interest. The FCA therefore made a market investigation reference regarding the institutional advice market to the CMA.
The CMA identified the following separate markets for the purposes of its market investigation:
- Investment consultancy services i.e. the provision of advice in relation to strategic asset allocation, manager selection, fiduciary management, and to employers in the UK.
- Fiduciary management services i.e. the provision of a service to institutional investors where the provider makes and implements decisions for the investor based on the investor’s investment strategy in the UK.
CMA report
The CMA's report looked in detail at the following issues: market assessment (the demand and supply features of the markets); trustee engagement; the sale of fiduciary management services by investment consultancy firms; conflicts of interest; and market outcomes.
The CMA has found that investment consultancy and fiduciary management are not highly concentrated markets, the barriers to entry and expansion are low in each case and both markets are growing. Customers have access to a sufficient number of providers in both markets.
However, the CMA found an adverse effect on competition in investment consultancy and fiduciary management markets which results in substantial customer detriment.
The features of the investment consultancy market which distort competition include:
- low levels of engagement by some customers;
- a lack of clear information for customers to assess the quality of their existing investment consultant; and
- a lack of clear and comparable information for customers to assess the value for money of alternative investment consultants.
The features of the fiduciary management services market distorting competition include:
- integrated investment consultancy and fiduciary management (IC-FM) firms steering their advisory customers towards their own fiduciary management services;
- low levels of customer engagement at the point of first moving into fiduciary management;
- a lack of clear and comparable information for customers to assess the value for money of alternative fiduciary managers;
- a lack of clear information for customers to assess the value for money of their existing fiduciary manager; and
- barriers to switching fiduciary manager.
AEC finding: CMA remedies
Remedies identified by the CMA include:
- Introducing mandatory tendering when pension trustees first purchase fiduciary management services and a requirement to run a competitive tender within five years if a fiduciary management mandate was awarded without one.
- A requirement on investment consultants to market separately their fiduciary management services and their investment service advice, and to inform customers of their duty to tender in most cases before buying fiduciary management.
- The Pensions Regulator is to give greater support for pension trustees when running tenders for investment consultancy and fiduciary management services, and to issue guidance for pension trustees to support other remedies.
- Requirements on fiduciary management firms to provide better and more comparable information on fees and performance for prospective customers, and on fees for existing customers.
- A requirement for pension trustees to set objectives for their investment consultant so as to assess the quality of investment advice that they receive.
- A requirement on investment consultancy and fiduciary management providers to report performance of any recommended asset management products or funds using basic minimum standards.
The CMA is also recommending that the Government allows the Pensions Regulator to provide oversight on remedies in relation to pension scheme trustees and is also calling for an extension to the FCA's regulatory perimeter to include all of the main activities of investment consultants.
The remedies will be implemented by way of an Order on pension scheme trustees and firms providing these services. The CMA is expected to issue a consultation in early 2019 and it expects the remedies to be effective later in 2019. The FCA has issued a statement expressing support for the findings of the report.
