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CMA proposes changes to the markets for investment consultancy and fiduciary management

  • United Kingdom
  • Pensions


Executive summary

The CMA’s Provisional Decision Report was published on 18 July 2018 following its market investigation into the supply and acquisition of investment consulting (IC) and fiduciary management (FM) services. The Report runs to 330 pages (498 including the Appendices and Glossary) and sets out the CMA’s provisional findings based on an extensive investigation that began with a reference from the FCA on 14 September 2017 under the Enterprise Act 2002.

The Report provisionally finds that there are competition issues in both the IC and FM markets, with greater concerns arising in relation to the FM market. The Report therefore includes a package of provisional remedies intended to address these problems in a proportionate way.

These provisional remedies fall short of the more drastic structural remedies the CMA had said it was considering earlier in the process (such as forcing the division of firms that provide integrated IC-FM services). Instead, the focus is on empowering the buy-side of each market by equipping trustees with the information and processes needed to make the most effective decisions.

Reminder of the background

In June 2017, the FCA published its Final Report in its asset management market study and, following a period of consultation, announced that it had decided to refer the supply and acquisition of investment consultancy and fiduciary management services to the CMA for a market investigation.

The purpose of a market investigation is to determine whether any feature or combination of features of a particular market prevents, restricts or distorts competition in connection with the supply or acquisition of goods or services in the UK – that is, whether they lead to an “adverse effect on competition” (an “AEC”). If an AEC is found, the CMA is empowered to decide whether remedial action should be taken and, if so, to identify effective and proportionate remedies.

The CMA’s investigation started with the publication of its Statement of Issues on 21 September 2017. This was followed by a phase of reviewing responses to the Issues Statement and initial submissions, appointing a third party to carry out a survey of occupational pension scheme trustees (the Results of which were published on 29 March 2018), and a series of hearings with IC and FM providers and others including pension scheme trustees and in-house investment staff.

Once this initial phase of investigative work had been completed, the CMA then prepared, and issued for consultation, a number of working papers setting out its emerging findings and the remedies it was considering where it felt measures were required. IC and FM providers were invited to make submissions on these working papers and certain providers then made additional submissions prior to the publication of the Provisional Decision Report.

Summary of the CMA’s findings

The CMA has provisionally found that in the IC market:

  • there is a low level of engagement by some trustees in choosing and monitoring their provider;
  • there are insufficiently clear objectives against which trustees can measure the performance of IC providers;
  • trustees are not given sufficient clarity on fees or on information needed to evaluate the quality of their existing IC;
  • this makes it difficult for customers to identify whether they would be better off using an alternative provider.

In the FM market, the CMA provisionally found that:

  • firms which provide IC and FM services have an incumbency advantage;
  • there is a low level of trustee engagement at the point of first moving into the service;
  • ICs steer their advisory customers towards their own FM service;
  • prospective purchasers of FM services do not have access to comparable information on the historic performance of FM providers, or clarity on their fees;
  • trustees tend to remain with their IC for FM services even if a better deal on FM is available elsewhere;
  • there are relatively high costs of switching FM provider; and
  • it may be difficult for many customers to access and assess the information they need on the fees of their existing FM provider and to identify whether they would be better off using an alternative provider.

The CMA is concerned that these factors could result in a greater concentration of the FM market in the largest existing providers who provide integrated IC-FM services and that this could in turn prevent other providers from entering the market and further restrict competition.

Overall, these features reduce IC and FM customers’ ability to drive competition between ICs and FMs respectively and reduce providers’ incentives to compete. In turn, this may result in material detriment in the IC and FM markets.

Summary of the CMA’s provisional remedies

To address the problems the CMA has identified, the Report sets out a number of proposals for reform in relation to each market which are intended to remedy the issues in an effective and proportionate way – these are summarised below.

Promoting greater trustee engagement when first buying FM services:

  • a requirement for trustees to tender for FM services on an initial appointment (and, for existing appointments not competitively tendered, run a tender process within the first five years);
  • the provision of greater support from the Pensions Regulator for trustees running FM appointment processes; and
  • a duty for integrated IC-FM providers to give clear warnings prior to a new FM appointment which alert trustees to the nature of information being provided by the firm and highlight the guidance available from the Pensions Regulator.

FM fees and performance reporting:

  • an obligation for integrated IC-FM firms to provide a breakdown of fee information to trustees on at least an annual basis;
  • a duty for FM firms to provide greater clarity to existing clients on costs (including exit costs in particular); and
  • the implementation of a standardised method to measure the performance of FM providers and a requirement to report on this to trustees.

IC appointment, fees and performance:

  • the provision of greater support from the Pensions Regulator for trustees running an IC appointment process;
  • a requirement for trustees to set objectives for their IC provider at least every three years in order to be able to judge the quality of the service they are receiving; and
  • the establishment of basic standards for reporting the performance of recommended asset management products and funds.

Recognising that these measures will, if implemented, require effective regulatory supervision, the CMA is also minded to recommend that:

  • the government extends the FCA’s regulatory perimeter to include the main activities of IC and FM providers;
  • the Pensions Regulator develops enhanced guidance for trustees when choosing and assessing current and prospective IC and FM providers; and
  • the work of the FCA’s Institutional Disclosure Working Group is implemented and its use and effect monitored.

Next steps

The CMA is now in a period of consultation in relation to its Report and has invited feedback on it by 24 August 2018. The CMA may choose to hold provisional decision response hearings with a number of parties with a deadline for all parties’ responses to be submitted by October 2018. The CMA is required by law to issue its final report by 13 March 2019.