The Competition & Markets Authority (“CMA”) published its final report on its market investigation into investment consultancy in December. The Government has now responded.
Pure investment consultancy
The CMA’s final report confirms that this market is not highly concentrated and there are no significant barriers for firms to enter the market, although expansion may be more difficult. Information about fees is clear.
On the other hand:
- the fee information in tenders is often limited, so it can therefore be difficult for trustees to compare providers;
- some schemes – especially smaller ones – don’t consider switching advisers;
- in general there is insufficient information for trustees to judge value for money and trustees tend not to set objectives for their consultants.
Fiduciary management
The final report notes that, in 2017, the three biggest providers of fiduciary management services accounted for 54% of the market for such services.
The CMA’s main concerns in this market are:
- whether to buy fiduciary management and which provider to appoint are very important decisions for trustees, as they are delegating significant control of their scheme’s assets to the provider. These decisions also have long-lasting consequences, given the costs of switching provider or exiting the service altogether;
- many trustees appoint a fiduciary manager – frequently their existing investment consultant – without putting the contract out to tender;
- while barriers to entry are not significant, they are higher than for pure consultancy; barriers to expansion are higher again and moving between fiduciary managers is much more costly and time-consuming than changing investment consultant.
Investment performance is often reported on a gross-of-fees basis which does not reflect the real outcome for the pension scheme. In addition, fees for the fiduciary management service are often bundled with the underlying asset management fees, reducing trustees’ ability to assess the value for money of the fiduciary management service and of the underlying funds. In general, there is no consistent framework for reporting fees.
Many trustees do not see information on the costs of moving into and out of these services, despite the fact that they can be considerable.
Across both disciplines there are different methods used to show the performance of recommended funds, making this information difficult to interpret and compare.
Proposed remedies
The CMA proposes the following remedies:
- mandatory tendering for clients adopting fiduciary management for the first time for more than 20% of their assets, including a requirement for clients who have already appointed a fiduciary manager without a tender to do so within 5 years,
- a requirement that investment consultants separate marketing of their fiduciary management service from their investment advice and inform customers of their duty to tender before buying fiduciary management,
- a recommendation that the Pensions Regulator provide guidance for schemes on how to run competitive tenders for investment consultancy and fiduciary management services,
- a requirement for fiduciary managers to provide separate information on their fees and the underlying fund management fees,
- a requirement for fiduciary managers to report their performance track record to prospective clients using a standardised methodology,
- requiring trustees to set strategic objectives for their investment consultants, against which firms must report,
- a requirement on investment consultants and fiduciary managers to report the performance of recommended asset management products or funds using basic minimum standards.
These remedies will be implemented initially by CMA Orders and are expected to be in place by the end of 2019.
In addition, the CMA recommends that most of these services be brought under FCA regulation so that they are on an equal footing with other parts of the investment industry.
Response from DWP, the Pensions Regulator and HM Treasury
In a letter dated 12 March 2019 representatives of the Department for Work & Pensions (“DWP”), the Pensions Regulator (“TPR”) and HM Treasury (“HMT”) agreed with the CMA’s proposed remedies.
The DWP will introduce regulations which put the CMA’s remedies, insofar as they apply to trustees, into the main body of pensions law. This will include enabling oversight by TPR. DWP’s intention is to consult during 2019 and to bring the legislation into force in 2020.
TPR accepts the recommendation to produce guidance to help trustees engage with fiduciary managers and aims to consult on the guidance in Summer 2019.
HMT is slightly less enthusiastic, undertaking only to consider the CMA’s recommendation that HM Treasury extend the FCA’s regulatory scope to cover services provided by investment consultants.