At a Glance…
Following an initial investigation by the Financial Conduct Authority (FCA), the provision of investment consultancy and fiduciary management services will now be subject to an in-depth investigation by the UK competition regulator – the Competition and Markets Authority (CMA). The CMA has wide powers to investigate and impose remedies. Industry participants should expect to receive requests to attend and give evidence, and to produce documentation and information to the CMA. Those with an interest in influencing the outcome of the CMA’s investigation should now be working to compile persuasive submissions and evidence to ensure their points of view are given due attention by the CMA.
The key concern identified by the FCA, and now referred for investigation by the CMA, is that the following features of the industry may distort competition between suppliers of investment consultancy and fiduciary management services:
- A weak demand side due to the limited experience of trustees, evidenced by low rates of switching by trustees between consultants
- An inability to assess the quality of advice provided by consultants, exacerbated by the limited availability of relevant data
- Persistent levels of market concentration and relatively stable market shares among investment consultants, with the three largest consultancy firms (Aon Hewitt, Mercer and Willis Towers Watson) estimated by the FCA to control around 60 per cent of the market, with little variation in shares over time
- High barriers to entry and expansion, particularly the inability of smaller or newer consultants to develop their business outside of niche, specialist areas, with trustees attaching considerable importance to brand and preferring well-known established firms
- Vertically integrated business models creating conflicts of interest where in-house fiduciary management and master trust services are recommended by investment consultants, and where investment consultants also provide services to asset managers that they might recommend to trustees
In order to try to avoid a CMA investigation, Aon Hewitt, Mercer and Willis Towers Watson offered to give undertakings to the FCA to implement compulsory competitive tendering procedures for investment consultancy services; to introduce published performance metrics covering manager selection, fiduciary management solutions, and fees and costs charged by investment consultants; and to restrict the recommendation by advisors of their own in-house master trust services. The FCA has, however, rejected these proposed undertakings on the basis that the FCA’s concerns and the importance of the market (with the advice of the 12 largest consultants affecting £1.6 trillion of assets) justify a full market investigation by the CMA, and also that any undertakings offered by Aon Hewitt, Mercer and Willis Towers Watson would not cover the remaining 40 per cent of the market not accounted for by these firms.
The CMA’s investigation will be long and detailed. The CMA must issue its final report by 13 March 2019, but may report sooner – its administrative timetable is still to be published. Investment consultants, institutional investors, fund managers and others should expect to be involved in the investigation and may be required to attend hearings, respond to questionnaires and provide confidential business information. The proceedings, documentation reviewed and final report will all be public, but the CMA will redact information where this is necessary to protect genuine business secrets. The CMA has wide powers to impose remedies, including intervention in existing agreements, imposing standards for the provision of services, the division or disposal of any business and publication of pricing and other financial information. There is also a more general power to accept undertakings which remedy concerns that have been finally identified. Those with a strong interest in the outcome of the investigation should be formulating and implementing their strategies for engagement with the CMA and influencing its thinking.