FCA refers asset management sector to the CMA for further investigation

On 14 September 2017, the UK Financial Conduct Authority ("FCA") announced its decision to make a Market Investigation Reference in relation to the supply and acquisition of investment consultancy services and fiduciary management services to and by institutional investors and employers in the UK.  This is the first time that the FCA has exercised its powers to make a Market Investigation Reference.  The Competition and Market Authority (the "CMA") will now begin an 18-month market investigation to establish whether any feature of the referred markets prevents, restricts or distorts competition.

Investment consultancy services involve the provision of advice in relation to asset allocation, manager selection and fiduciary management, and advice to employers.  Fiduciary management services involve advising a client on how to invest their assets and making those investments on behalf of the client for some or all of their assets.  The FCA highlighted the size and importance of the market, noting that institutional clients hold about £5.5 trillion of assets under management ("AUM") in the UK, with pension funds being the largest institutional client type, amounting to £2.1 billion of AUM.  The FCA also noted in particular that almost all defined benefit pension schemes – representing £1.5 trillion of AUM – take advice from investment consultants.  Accordingly, the industry directly affects the interests of millions of people in the UK.    

The FCA's Interim Report

The FCA began its market study into the wider asset management industry in November 2015, and published its Interim Report and provisional decision to make a reference in November 2016.  In its Interim Report, the FCA identified the following factors indicating a lack of effective competition in investment consultancy:

• a weak demand side;
•  an inability to assess the quality of advice provided by consultants;
• persistent levels of concentration and stable market shares among consultants;
• high barriers to entry and expansion; and
• vertically integrated business models, which can lead to conflicts of interest for different services offered to clients.

Undertakings in lieu of a reference were offered, but rejected

The UK's three largest investment consultants, Aon Hewitt, Mercer and Willis Towers Watson (who represent around 60% of the market), offered a package of undertakings in an attempt to address the concerns identified without a need for a reference.  The undertakings included proposals to:

• engage in regular competitive tendering for investment services contracts;
• provide information to clients to enable them to assess and compare manager performance over time;
• adopt standards for the provision of information on performance, fees and cost structures to allow direct comparison of managers' track records; and
• adopt and implement a code of conduct, covering issues such as: duties to the client; the information needs of the client; conflicts of interest; gifts and entertainment; redress procedures; and recommendations for regular review and tender of investment services.

The package of undertakings offered broadly reflected the FCA's proposals in its Interim Report.  However, the FCA was concerned that it could not be confident, without a full market investigation, that the proposed remedies would be sufficient to address the competition concerns identified in the sector, and accordingly it rejected the remedy offer in favour of a reference in its Final Report. In this regard, the fact that only three market participants - accounting for a little over half of the market - were offering undertakings, is likely to have been a relevant factor.   

The CMA's Statement of Issues

Following the FCA's reference decision, the CMA indicated in a Statement of Issues, published on 21 September 2017, that it will test three potential theories of harm:

• whether customer difficulties in assessing, comparing and switching investment consultants create weak incentives for consultants to compete for customers;
• whether conflicts of interest (e.g. in terms of promoting in-house products or services, outside business relationships, or receipt of gifts and hospitality) reduce the quality and/or value for money of services provided to customers; and
• whether barriers to entry reduce competitive pressure on investment consultants.      

The CMA has already published potential remedies addressing these concerns, and has invited responses to a series of questions to assess their effectiveness and proportionality.  However, the CMA has emphasised that it has yet to determine whether any competition concerns arise, and that there is no presumption that any adverse effect on competition will be found. 

Next steps and comment

The CMA will now begin a period of information gathering and engagement with interested parties.  It aims to publish its Provisional Decision in July 2018, and the statutory deadline for the final report on the reference is 13 March 2019.  If the CMA identifies an adverse effect on competition, it may accept undertakings from market participants to address the concerns or impose remedies by order.  It may also make recommendations for the amendment of relevant regulation. 

Given the FCA's knowledge of and expertise in the markets concerned, it is interesting that the FCA has concluded that the CMA is best placed to investigate the relevant markets and to remedy any concerns identified, through the powers afforded under the reference process.  It is likely to be a matter of some frustration for interested parties that, after a market study which has lasted nearly two years, the FCA has now decided to make a reference to a different regulator – triggering a further investigation process - on concerns which it first identified in its Interim Report in November 2016.  It is also noteworthy that the FCA has recommended that the Treasury brings investment consultancy services, such as asset allocation advice, within the scope of the FCA's regulatory powers, and accordingly there is a strong possibility that the reference will lead to enhanced regulation in the sector.   

All articles in the October edition of the Competition Newsletter

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