The Competition & Markets Authority (“CMA”) has published the provisional findings of its market investigation into investment consultancy. It has found some evidence of competition problems in relation to investment consultancy but has more serious concerns about the fiduciary management (known also as delegated consulting) market. Proposed remedies include mandatory tendering for schemes moving to fiduciary management and requiring firms to provide clearer information to clients.
Background
The Financial Conduct Authority (“FCA”) referred the investment consultancy industry to the CMA in September 2017, noting that the market was dominated by three large firms (Aon, Willis Towers Watson and Mercer). The market advises on and/or manages at least £1.6 trillion of pension scheme assets.
The umbrella term “investment consultancy” includes both
- “pure” investment consultants who advise clients on investment strategy and on the selection of fund managers and
- fiduciary managers who advise and manage funds for the same clients.
The CMA gathered information from firms in these markets, as well as from trustees of all types of pension schemes.
Pure investment consultancy
The CMA established that this market is not highly concentrated and that it is relatively easy for clients to switch adviser. In particular:
- no firm has a market share exceeding 20%;
- the three largest firms account for less than 50% of the market and
- there are no significant barriers for firms to enter, or expand in, the market.
On the other hand:
- some trustees don’t have the skills or the time to scrutinise their consultants;
- some schemes – especially smaller ones – don’t consider switching advisers and
- in general there is insufficient information of the quality of services for trustees to judge value for money.
Fiduciary management
Fiduciary management is a relatively new service and has grown quickly: tenfold over the last 10 years. It costs more than investment consultancy, because more services are provided, and involves significant handover of control from the client to the fiduciary manager. The CMA’s main concerns in this market are:
- 50% of trustees moving into fiduciary management simply appoint their existing investment consultants and a third of other schemes appoint a fiduciary manager without putting the contract out to tender;
- it is difficult for trustees to obtain information to help them assess their current or prospective fiduciary manager;
- firms offering both fiduciary management and investment consultancy have been able to “steer” consultancy clients into their fiduciary offering,
- while barriers to entry are not significant, barriers to expansion in the market are higher and
- moving between fiduciary managers is much more costly and time-consuming than changing investment consultant.
In addition, information on fees provided by fiduciary managers to current clients lacks clarity, with fees for the fiduciary management service often bundled with the underlying asset management fees. Comparing the fees of alternative providers can also be difficult as there is no consistent framework for reporting fees.
The fiduciary management market is not highly concentrated but the larger firms offering both services have enjoyed a sharp rise in their market share. The CMA is concerned that this may lead to higher prices and lower quality of service.
Proposed remedies
The CMA proposes the following remedies:
- mandatory tendering for clients adopting fiduciary management for the first time, including a requirement for clients who have already appointed a fiduciary manager without a tender to do so within 7 years,
- mandatory warnings from investment consultants selling fiduciary management services to their clients that this is not part of their role as trusted investment advisers,
- a recommendation that the Pensions Regulator provide guidance for schemes on how to purchase investment consultancy and fiduciary management services,
- better information on fees and quality,
- requiring trustees to set their investment consultants strategic objectives against which firms must report
- bringing most of these services under FCA regulation so that they are on an equal footing with other parts of the investment industry.
Next steps
The CMA is seeking responses to its provisional findings and proposed remedies by 24 August 2018 and will publish its final report by 13 March 2019.