18 July 2018
The CMA has published today provisional decisions from its investigation into the market for investment consultants following a referral of the industry by the Financial Conduct Authority in September last year.
Based on the Executive Summary of the report, we make a few high-level comments below.
The CMA has identified a number of issues in the investment consultancy and fiduciary management markets and has provisionally decided to implement the following primary remedies:
- Trustees will be required to set and monitor their investment consultant against a tailored set of strategic objectives. "We look forward to working with trustees and The Pensions Regulator in designing a practical framework for delivering this."
- Pension scheme trustees will need to run a competitive tender process when they first purchase fiduciary management services. Existing fiduciary management clients will be required to run a tender within five years, if the original mandate was awarded without a competitive tender. “This robust remedy clearly reflects the CMA’s significant concerns about how fiduciary management products are sold by firms that offer both investment consultancy and fiduciary management services.”
- Fiduciary managers will be required to disclose detailed information on fees to current and prospective clients. “We welcome this enhanced disclosure requirement; it makes sense that clients know what they are paying for any particular service they commission.”
- Investment consultants and fiduciary managers will be required to publish the performance of their asset management recommended buy-lists. “While this greater transparency may well be of use to customers, our main reservation is that, as one of the few quantitative measures available, customers may overly focus on this aspect of the investment consultancy service, which has materially less impact on overall outcomes than strategic asset allocation advice. We will work constructively with the CMA with a view to ensuring that this remedy enhances customer choice.”
- A wider range of investment consultancy services to fall within the Financial Conduct Authority ‘regulatory perimeter’. “Any change in coverage will need to be proportionate and clearly defined.”
Paul Gibney, Partner at LCP, said: “Pure advisory firms that do not offer a fiduciary management service have not been the primary focus of the investigation. The CMA has found that this particular market is not overly concentrated, with a large number of providers active in the market, and that entry barriers are not high, while information on fees is generally clear for current customers. The CMA is proposing additional transparency measures to enhance customers’ ability to assess investment consultants’ quality and value for money.
“Firms that offer both investment consultancy services and fiduciary management services have come under closer scrutiny, with the CMA identifying the greatest competition concerns in this area. The CMA has found that some customers have been steered towards fiduciary services offered by their incumbent investment consultant, without sufficient comparison against other providers’ offerings. In some cases there have been strategies and financial incentives to sell fiduciary services to existing consultancy clients. Regulatory bodies are therefore right to seek a solution, here.”
“The CMA’s investigation has focused on whether customers of investment consultants – and particularly pension scheme trustees – are impacted adversely by: their ability to assess and compare investment consultants; the extent, and management of, consultants’ conflicts of interest; and, the existence of any barriers to entry and expansion in the market.
“We welcome the publication of the Provisional Decision Report. The CMA has conducted a thorough review of the investment consultancy industry, dedicating significant resource and effort to understand the market and its participants. Ultimately, the CMA’s scrutiny of investment consultants will improve the standard of service and will benefit pension scheme trustees and members.”