Trustees who use the services of a fiduciary manager (or who may do so in the future) should be aware of new mandatory tendering requirements coming into force on 10 December 2019. The requirements have been introduced by an order of the Competition and Markets Authority, following its investigation into the investment consultancy and fiduciary management markets.
The CMA found an adverse effect on competition in the investment consultancy market and – to a greater degree – the fiduciary management market from which substantial customer detriment may be expected to result. It therefore proposed a package of remedies, which have now been implemented by the order.
What are the mandatory tendering requirements?
Where trustees already use the services of a fiduciary manager in relation to at least 20% of the scheme’s assets, they must carry out a competitive tender process within five years of the date on which the fiduciary manager was appointed if they were originally appointed without one. If the five-year deadline has already expired (or will expire within the next two years), the trustees must carry out a competitive tender process within the next two years.
Trustees will also be required to carry out a competitive tender process when first purchasing fiduciary management services covering 20% or more of the scheme’s assets (or when extending an existing mandate to cover 20% or more of the scheme’s assets).
Fiduciary managers are subject to mirror requirements, which mean that they must not agree to provide fiduciary management services unless a competitive tender process has been carried out by the trustees (and the trustees have provided written confirmation to this effect).
A competitive tender process requires the trustees to use reasonable endeavours to obtain bids for the provision of fiduciary management services from three or more unrelated fiduciary management providers.
Some exceptions apply – for example, the requirements don’t apply to schemes with an in-house fiduciary management function.
What other new requirements are being introduced?
As well as the mandatory tendering requirements, the order includes the following requirements:
- firms which supply investment consultancy and fiduciary management services must separate their advice and marketing material, and include mandatory wording in all marketing material;
- fiduciary managers must report disaggregated fiduciary management fees to existing clients, and meet minimum requirements regarding disclosure of costs and charges when selling fiduciary management services;
- fiduciary managers must use a standardised methodology and template for reporting past performance to potential clients;
- trustees must set strategic objectives for their investment consultant;
- investment consultants and fiduciary managers must meet basic requirements when reporting to potential clients on the past performance of their recommended asset management products and in-house investment products; and
- trustees, investment consultants and fiduciary managers must produce various compliance statements and submit them to the CMA. Some of these requirements came into force on 10 June, while others will come into force on 10 December.
What happens next?
The government has confirmed that:
- It will consult this year on draft regulations to "put the CMA's remedies, insofar as they apply to trustees, into the main body of pensions law".
- The Pensions Regulator will consult this summer on guidance to help trustees in running a competitive tender process and, more broadly, on engaging with fiduciary managers and investment consultants.
- HM Treasury will consider extending the FCA's regulatory perimeter to cover services provided by investment consultants and consult "in due course".
Meanwhile, the FCA has confirmed it will be consulting on introducing rules for firms offering fiduciary management services. Following any extension of its regulatory perimeter, it will also consult on rules for investment consultants.
Is any action required?
Trustees who already use the services of a fiduciary manager in relation to at least 20% of the scheme’s assets will need to carry out a competitive tender process within five years of the date on which the fiduciary manager was appointed if they were originally appointed without one. Trustees considering purchasing fiduciary management services (or considering extending an existing mandate to cover 20% or more of the scheme’s assets) will also need to comply with the mandatory tendering requirements.
In addition, trustees will need to set strategic objectives for their investment consultant if they do not already do so.