The City watchdog has finally referred investment consultants and fiduciary managers to the competition authorities following months of speculation.
The Financial Conduct Authority (FCA) first muted recommending a Competition and Markets Authority (CMA) probe in November when the initial findings of its asset management review were published.
The review examined how savers could make better choices when funding their retirement. The main findings of the two-year study were that asset managers should simplify costs, improve governance and face greater competition.
This latest move by the authors of the report means that the FCA has rejected proposals from the industry’s three largest players to police themselves.
One of the FCA’s biggest concerns is a lack of competition with Aon Hewitt, Willis Towers Watson and Mercer controlling up to 80% of the market.
Willis Towers Watson responded to the decision by saying it will work with the CMA on its probe to “help bring clarity and consistency to an industry which has to manage potential conflicts of interest”.
The Pensions and Lifetime Savings Association (PLSA) welcomed the decision. Investment and defined benefits policy lead Caroline Escott said in representing 57% of all institutional investments, workplace pension schemes are important users of the services provided by investment consultants.
“Investment consultants can play a positive role in the institutional investment chain, and many PLSA members have told us they are happy with the services offered by their investment consultants,” she added.
“Nonetheless others have expressed concerns about the potential misalignment of incentives in the sector and the FCA’s studies have highlighted competition issues on both the demand- and the supply- side.
“We do however urge the CMA to be mindful of the need for any investigative measures taken to be proportionate and timely to prevent avoidable costs or uncertainty for schemes during its review.”
The Transparency Task Force’s founding chair Andy Agathangelou described the decision as “momentous”.
“Every right-minded financial services professional must surely want a competitive, vibrant and conflict-free financial services market and that is what this decision is all about,” he added.
“By managing out conflicts of interests and anti-competitive behaviours and by helping to ensure that all those who should be regulated are regulated, we can continue to undertake the cultural transfusion that is now taking place in the sector. Only then can we properly repair the self-inflicted reputational damage the sector has suffered for decades.
Pensions Management Institute technical consultant Tim Middleton said is not surprised by the move.
“The growing trend for consultancies to offer asset management services – and for these services to be recommended to clients – inevitably raises valid questions about conflicts of interest, particularly in a sector dominated by three large firms,” he added.
“However, of most concern to the PMI is the FCA’s identification of the limitations shown by trustees with regard to their understanding of the advice they receive.
“Funding problems for defined benefit (DB) schemes have seen the evolution of increasingly complicated investment strategies, and it is all too obvious that far too many trustee boards are heavily dependent on their investment advisers and lack the confidence to challenge the advice they are given.”
