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The CMA’s Final Order following its IC and FM market investigation

  • United Kingdom
  • Pensions


On 10 June 2019, the Competition and Markets Authority (CMA) gave notice that it had made its Final Order following its market investigation into the investment consulting (IC) and fiduciary management (FM) sectors. The publication of the Final Order marks the conclusion of a thorough and extensive investigation by the CMA, which started with the reference made to it by the FCA under the Enterprise Act 2002 on 14 September 2017.

This Speedbrief gives a brief introduction to the Final Order, sets out the key new obligations on trustees, and captures the next steps trustees should consider taking. For a detailed summary of the context and purpose of the CMA’s market investigation, its findings and proposed remedies, please see our speedbrief on the CMA’s Final Decision Report from December 2018.

Introduction to the Final Order

The CMA’s Final Decision Report was published on 12 December 2018 and, on 11 February 2019, the CMA published its proposed remedial Order in draft for consultation. The CMA received 21 responses to its consultation on the draft Order and, in light of these, proceeded to make some modifications to it. The CMA did not consider these modifications to be material and so decided, in accordance with its statutory obligations under the Enterprise Act 2002, that no further consultation was required.

Prior to making its Final Order, the CMA notified the European Commission that it was proposing to introduce certain measures going beyond the scope required by EU law (namely, the requirements of MiFID II on the disclosure of investment costs and charges). The European Commission had to be given two months in which to provide its comments on the proportionality of, and justification for, the CMA’s proposed measures and the two-month period expired on 5 June 2019.

Key new obligations for trustees

The Final Order applies to trustees and providers of IC and FM services alike, but the key new obligations for trustees to be aware of are summarised below. They will take effect from 10 December 2019 and the first applies to all trustees regardless of whether they are using FM.

Prohibition on accepting IC services unless the IC provider has been set “Strategic Objectives” Trustees will be prohibited from either continuing to receive IC services pursuant to an existing contract, or entering into a new contract for the supply of IC services, unless they have set the IC provider Strategic Objectives. “Strategic Objectives” are defined in the Order as objectives for the IC provider’s advice on the following matters in accordance with the trustees’ investment strategy: (a) investments the trustees should make or retain, (b) the preparation or revision of the trustees’ SIP, (c) strategic asset allocation, and (d) manager selection. For the avoidance of doubt, such advice expressly excludes the high-level commentary given by scheme actuaries in triennial valuation reports regarding the link between a scheme’s investment approach and funding objective.
Prohibition on accepting FM services without first carrying out a “Competitive Tender Process” This is the obligation that has attracted the most coverage in the pensions press. A Competitive Tender Process is one whereby the trustees (or an agent on their behalf) has used reasonable endeavours to obtain written proposals from three independent FM service providers offering to provide FM services to the trustees for a stated price. A Competitive Tender Process will need to be carried out in the following circumstances:
  • if no FM appointment is already in place, where trustees appoint an FM provider in respect of 20% or more of their scheme’s assets (or more than one FM provider over, in aggregate, 20% or more of scheme assets);
  • if an FM appointment is already in place, the requirements depend on whether that appointment covers 20% or more of the scheme’s assets –
    • if it does, and it wasn’t awarded following a compliant Competitive Tender Process, such a process will need to be run within five years of the appointment being made and, if that period has already expired or will expire within two years of the date the Order was made (10 June 2019), the Competitive Tender Process will need to be run before the end of that two year period; and
    • if the existing appointment doesn’t already cover 20% or more of the scheme’s assets, and it wasn’t competitively tendered in the first place, it will need to be subject to a Competitive Tender Process if the mandate is subsequently extended to cover 20% or more of the scheme’s assets or a further FM appointment is made which, together with the existing appointment, takes the assets under FM to or above 20% (in which case, the new appointment will need to be competitively tendered too). If the existing appointment was competitively tendered, any increment in that mandate to or above 20% will still need to be competitively tendered.
Compliance statements The Final Order requires trustees to submit a “Compliance Statement” to the CMA by, in effect, 7 January 2021, certifying their compliance with the obligations summarised above, and to do so each year after that. The statement must certify that the trustees have complied “in all material respects” with the requirements of the Order and “reasonably expect to continue to do so”. In addition, if trustees become aware that they have failed to comply with the Order in any way, they must send the CMA a report within 14 days of becoming aware of such non-compliance setting out how they have failed to comply and describing the steps they have taken to address the failure.

Further governmental measures

In support of its remedies, the CMA made the following recommendations in its Final Decision Report to certain other governmental/regulatory bodies:

  • HM Treasury should pass the necessary legislation to extend the FCA’s regulatory perimeter to include all of the main activities of investment consultants.
  • TPR should develop guidance to support trustees in asking for, and using, the enhanced information they will be able to access as a result of the CMA’s package of remedies.
  • The FCA should maintain oversight of the transparency of asset management fee reporting to ensure the progress made by the Institutional Disclosure Working Group is sustained.
  • The DWP should pass the legislation needed to enable tPR to oversee the remedies that impose requirements on trustees.

Each of these other bodies has responded positively to the CMA’s recommendation to it and has indicated that it will take the steps needed to implement the CMA’s recommended measures (albeit the Treasury has said that, in view of competing legislative priorities connected with the UK’s withdrawal from the EU, its steps will be subject to the prevailing legislative agenda).

Next steps for trustees

While the Final Order imposes a substantial number of new obligations on FM and IC service providers, it also subjects trustees to a raft of additional compliance obligations:

  • One of the most important points for trustees to be aware of in relation to the CMA’s work is that the outcomes affect every DB occupational pension scheme in the UK to some degree – the new requirement to set strategic objectives for investment consultants, and to certify compliance with that requirement to the CMA on an annual basis, will apply regardless of whether a scheme is using the services of an FM provider.
  • Clearly, where FM services are engaged, trustees will need to ensure that they are complying with the requirements to run a competitive tender process and that they are applying the necessary scrutiny to the information they can expect to receive on fees and performance.
  • Trustees will first be required to certify their compliance with these obligations in early January 2021, and they will also be required to notify the CMA within 14 days if they discover they are non-compliant in any respect, so the task of complying will begin from 10 December 2019 and trustees would be well-advised to behave as if the Order were in force now to ensure they are compliant from day one.

Where trustees are uncertain of their obligations, or need support in assessing the information they are provided with by IC and FM providers, they would be wise to seek advice to ensure they remain on the right side of the law and, above all, are operating in the most effective way possible for the benefit of their members and scheme sponsors.

For an article giving a more detailed summary of the CMA’s Final Order, including the differences between the draft and final versions and the new obligations on IC and FM service providers, please click here.