Trustees rely on their investment consultants and, increasingly, their fiduciary managers to provide investment advice and (in the case of fiduciary managers) make investment decisions.
Last year, the Financial Conduct Authority highlighted concerns about whether competition was working properly in the investment consultancy and fiduciary management market. Following an investigation, the Competition and Markets Authority yesterday published its provisional decision report. It has found competition problems in both the investment consultancy and – to a greater degree – the fiduciary management markets. The CMA thinks these problems are likely to result in material harm to trustees through, for example, higher prices and a lower quality of service. It has therefore proposed a package of remedies to address these issues.
Interestingly, the CMA has placed much of the onus for change on trustees (as the customer) rather than investment consultants and fiduciary managers (as the providers). In particular, the proposals will have a significant impact on the way in which trustees obtain investment consultancy and fiduciary management services. They should also improve the information trustees receive from their providers, but they fall short of any more fundamental changes to the market.
What competition problems has the CMA identified?
The issues in relation to investment consultancy include:
- some trustees don’t have the skills or time to scrutinise their investment consultant;
- some schemes, particularly small and defined contribution schemes, have low levels of engagement in the market. This means they don’t switch, tender or find other ways to put competitive pressure on their investment consultant; and
- there isn’t sufficient information on the quality of these services for trustees to judge if they’re getting a good deal.
The CMA thinks that fiduciary management has similar problems to investment consultancy, but it also has more serious concerns:
- many trustees aren’t shopping around when first moving into fiduciary management. Two-thirds don’t tender and half of schemes simply appoint the firm that was already their investment consultant;
- trustees find it hard to get the information that will help them make a good choice when picking a fiduciary manager or assessing their existing provider;
- firms that offer both investment consultancy and fiduciary management enjoy an incumbency advantage when selling fiduciary management to their existing consultancy customers. Some of the ways in which they introduce and market fiduciary management steer trustees to their own service, making it less likely they shop around; and
- once in fiduciary management, it may be difficult for trustees to move as it is very costly and time-consuming to do so.
What remedies are the CMA proposing?
The CMA is making the following proposals to address the problems it has identified:
- the introduction of mandatory tendering when trustees first move to fiduciary management and a requirement to run a competitive tender within five years if the existing fiduciary mandate was awarded without a competitive tender;
- mandatory warnings when selling fiduciary management, making it clear that marketing of fiduciary management services to existing advisory customers is not part of the provider’s role as trusted investment adviser;
- new and improved guidance from the Pensions Regulator for trustees on how to purchase investment consultancy and fiduciary management services;
- the introduction of industry standards for investment performance reporting;
- a requirement for fiduciary managers to break down the fees for their service;
- a requirement for trustees to set their investment consultant strategic objectives, with firms required to report against these; and
- extending the FCA’s regulatory perimeter to include the main activities of investment consultants and fiduciary managers.
What does it mean for trustees?
Ultimately, the proposed changes should benefit trustees by reducing price and improving the quality of service they receive. In particular, the introduction of standardised investment performance reporting and more transparency around fees should make it easier for trustees to compare different providers. In practical terms, the introduction of mandatory tendering (including for existing fiduciary mandates) and the requirement to set strategic objectives will have the most significant impact on trustees who do not already do this.
However, the changes will not be immediate: the CMA is inviting feedback on the provisional decision report by 24 August 2018, with the statutory deadline for the CMA’s final report being 13 March 2019. The changes will only be implemented following publication of the final report.