In September last year, the FCA confirmed its intention to make a reference to the Competition and Markets Authority on the provision of Investment Consultancy Services and Fiduciary Management Services.
The CMA is presently undertaking that reference and has published a number of Working papers setting out its findings to date. At this point, we consider in more detail what prompted the FCA reference to the CMA and what the initial findings are.
1. Issues prompting FCA Reference
If one goes back to the beginning, it is important to understand the terms of the reference issued by the FCA for the two separate, but in reality, closely-related areas of service. The FCA defined the markets in respect of which the investigation was to be undertaken in the following manner.
Investment consultancy services are defined as:-
“the provision of advice in relation to strategic asset allocation, manager selection, fiduciary management, and to employers in the UK”
In turn, fiduciary management services are defined as:-
“the provision of a service to institutional investors where the provider makes and implements decisions for the investor based on the investor’s investment strategy in the UK. This service may include responsibility for all or some of the investor’s assets. This service may include, but is not limited to, responsibility for asset allocation and/or fund/manager selection”.
The main recipients of these services are likely to be pension scheme trustees.
In essence, the FCA is concerned with a number of factors affecting both these markets. These include:-
- too much dependency on investment consultants by pension fund trustees. Trustees are required by Pensions Acts to take proper investment advice and there is a concern that they often do not have expertise to challenge investment consultants and assess the quality of advice that they receive. As regards the latter issue, the FCA is particularly concerned that there is not sufficient data available to assess the impact of the advice being given. This extends further to a perception that there is not enough transparency in fees for the industry as a whole. The FCA have characterised this as a weak demand situation;
- a perceived lack of competition- as evidenced by possible high levels of concentration in the market with a low level of switching providers;
- barriers to expansion into the market by smaller firms as (i) trustees have tended to rely on existing reputation in selecting advisors and (ii) there are difficulties in comparing results achieved by providers;
- vertically integrated business models and conflicts of interest by consultants – the concern here centred on the role investment consultants have in recommending fellow group companies for fiduciary management services.
This investigation should also be seen in the wider context of the FCA’s drive to ensure that investors are getting value for money from their advisers and managers and that Investment Consultants have a strong incentive to manage costs appropriately. In effect, the FCA want to ensure that existing providers are constantly challenged to provide a high quality service.
2. Provisional findings by the CMA
The CMA has been releasing Working Papers setting out the progress of its investigation. To date eight Working papers have been published and there does seem to be a trend in these papers towards the CMA forming a view that the market is not working as well as it could. Amongst the views taken by CMA to date are:-
- There is probably too much integration between the Investment Consultant market and the market for Fiduciary Management Services. There is in effect too much pressure on pension scheme trustees to buy Fiduciary Management Services from their own Investment Consultants. It would seem that the CMA are coming to the view that more needs to be done to allow pension scheme trustees to consider a wider market for Fiduciary Management Services and to look more actively for the right provider. More work is needed to address potential conflicts where Investment Consultants are promoting their own fiduciary management offering. This might entail greater focus on tendering or greater reporting to members of the scheme- in effect the trustees would be under more pressure to justify how they have selected managers. The CMA is also considering controls which would be placed on Investment Consultants as to how Fiduciary Management Services are sold to ensure the market is opened up to a greater extent;
- Some concerns as to the effectiveness of the recommendations as to asset managers made by Investment Consultants. The CMA has come to a view that the recommendations made by Investment Consultants do not lead to performance which materially outperforms benchmarks, particularly after fees are taken into account. Accordingly, it has questioned whether the basis on which claims of performance are made need to be improved and stricter methodology applied as to how performance information is presented. The CMA is also moving to a position of recommending that the manner in which information is presented generally to trustees need to be improved including better fee information, performance metrics and information included in tenders;
- As part of the solution to some of the issues that have arisen, the CMA has been considering the level of trustee engagement in selecting and managing Investment Consultants and Fiduciary Management Services. They have considered a number of issues that would equip trustees better to engage with Investment Consultants and Fiduciary Managers including mandatory tendering and/or switching of providers, improvements to governance which might include a higher threshold of matters which trustees need to consider when reviewing the appointment of advisers. Trustees would also be expected to focus on value for money. There might also be enhanced reporting obligations to members which would force trustees on procedures adopted in the appointment process. The CMA also considered whether trustees’ who are more engaged achieved better value for money;
- The CMA having examined the market definition for investment consultants and fiduciary management services seem to be coming to the view that, taken as a whole, the market is not highly concentrated but that trends in the market for Fiduciary Management Services may lead in that direction. However the CMA is still considering whether the market for these services is functioning as well as it might and whether the barriers to entry are restricting competition.