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

  • 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. 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.

This article gives a brief introduction to the Final Order, summarises the main changes the CMA made to the draft Order, sets outs the key new obligations on trustees and IC and FM service providers, describes the effective dates of the CMA’s remedies (largely, 10 December 2019), outlines the further governmental measures currently in train, and captures the next steps trustees would be well-advised to consider taking.

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.

Summary of the modifications made to the draft Order

1 Exclusion for services provided to DC master trusts This exclusion has been extended to cover not just situations where an integrated IC-FM firm is the scheme strategist or scheme funder in respect of a DC master trust, but circumstances in which the scheme strategist/funder is a corporate body connected with an IC-FM firm.
2 Exclusion for services provided by in-house investment management companies Certain very large occupational pension schemes receive services from their own authorised in-house investment management companies. Such schemes include the BA pension schemes, the Railways Pension Scheme and the Universities Superannuation Scheme. The CMA has amended the Order to ensure that such companies are excluded from the scope of its remedies.
3 Definition of a “Competitive Tender Process” This has been amended so that it only requires trustees to whom the mandatory tendering obligation applies to use “reasonable” rather than “best” endeavours to obtain written bids from three or more independent (and competing) FM service providers. A requirement to use best endeavours is a high legal standard and this was felt too onerous for circumstances in which trustees will be reliant on others to participate in their process.
4 Definition of “Fiduciary Management Services” This has been extended to capture scenarios in which asset management services are provided by one entity and advisory services are provided by a partnership or joint venture involving that entity. The definition has also been amended to ensure it makes no difference whether the advice is provided to trustees before, at the same time as, or after the appointment of the asset management service provider.
5 Definition of “Investment Consultancy Services” This has been amended to confirm that such services include advice not just on the making of new investments but the retention of existing investments (such advice being required by trustees periodically to ensure they remain compliant with section 36(4) of the Pensions Act 1995).
6 Ability of FM providers to rely on trustees’ written confirmation of a compliant appointment process A new Article 3.7 has been added to the Order to confirm that FM service providers will not be held in breach of the Order if they accept an FM appointment in reliance on written confirmation from trustees that they have been selected as a result of a compliant competitive tender process (or, if applicable, that no such process was required).
7 Required fee disclosures to potential new FM clients Part 5 of the Order has been amended so that, when participating in a tender process carried out by trustees (whether a Competitive Tender Process as defined in the Order or not), FM service providers will be required to disclose and itemise “likely” (as well as known) costs and charges. In addition, Article 9.3 has been clarified to ensure it requires the disclosure of potential costs and charges in the event of the cessation of FM services (and not just the switching of FM service providers).
8 Information to potential clients on past performance Part 8 of the Order has been amended so that IC and FM service providers have to adhere to a minimum level of disclosure to potential new trustee clients in respect of the past performance not just of recommended asset management services or products but also in-house funds and financial instruments.
9 Deadline for submitting Compliance Statements This has been extended from within one week of each anniversary of the coming into force of the relevant provision of the Order to within four weeks of that anniversary.
10 Obligation to notify the CMA of failures to comply Part 9 of the Order has been amended so that the obligation on trustees and IC providers, FM providers and IC-FM firms to notify the CMA of a failure to comply with the Order applies only in respect of a breach of the Order by them (there is no obligation to blow the whistle on others).

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.

Part 7 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.
Part 3 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.
Part 9 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.

Key new obligations for FM and IC service providers

Trustees should be aware of the further obligations to which providers of FM and IC services are subject under the Final Order. These are, in broad terms, as follows:

Part 4 Requirement for IC-FM firms to separate FM marketing material from IC advisory material This requires integrated IC-FM firms to separate their FM marketing material from their advice in respect of IC and FM matters and to label FM marketing material so that it is clearly identifiable as such and contains the following wording on the first page and in the same size font as is predominantly used throughout the remainder of the document: “This document contains marketing material about our fiduciary management service. This document does not represent impartial advice on this service. In certain cases, you are required to conduct a competitive tender process prior to appointing a fiduciary manager. Guidance on running a tender process is available from the Pensions Regulator”.
Part 5 Prescribed requirements for the provision of fee information to existing and potential FM clients

This requires FM service providers to present existing and potential trustee clients with fee information on FM services to a certain level of detail and in a particular way.

  • For existing trustee clients, this includes providing a fee statement at least annually setting out, in a comprehensible form which trustees are reasonably able to understand and use as the basis for informed decision-making, a disaggregated itemisation of costs and charges which clearly shows (a) all costs and charges in respect of the FM services (advice, implementation and any performance fee), and (b) all asset management fees in respect of the FM service provider’s in-house funds and/or third party funds used by the FM service provider (such information to be presented on a fund-by-fund basis and to exclude execution costs and charges, e.g. transaction costs, which should be shown separately).
  • For potential trustee clients, FM service providers also have to show (a) any one-off costs and charges to be incurred in moving into FM with them (these include transaction costs (implicit and explicit), advice on portfolio refinement, on-boarding services and legal fees), and (b) the potential costs and charges to be incurred in exiting or switching FM service provision (including lock-in costs and contractual charges, as well as transaction costs).
  • In all cases, costs and charges must be expressed both as a cash amount and as a percentage of assets under management.
Part 6 Standardised method of reporting past performance of FM services This requires FM service providers to report their past performance to potential trustee clients using a standardised method and template (a Fiduciary Management Performance Standard). The performance standard must be put in place, in a form approved by the CMA, by 10 December 2019. Interestingly, the Order does not impose an equivalent obligation once FM service providers have been appointed and are then reporting performance to existing trustee clients.
Part 8 Standards for the presentation of the past performance of recommended products, funds and instruments Standards for the presentation of the past performance of recommended products, funds and instruments

Effective dates

Parts 3 and 7 of the Final Order (which trustees are required to comply with) come into force on 10 December 2019, as mentioned above.

Of the other parts (which apply to FM and IC service providers), all but one come into force on 10 December 2019 also. The exception is Part 6, which requires FM service providers to present information on the performance of their FM services to a particular standard – this came into force on the date the Final Order was made (10 June 2019) and, as mentioned above, requires FM providers to put in place an FM performance standard, approved by the CMA, by 10 December 2019.

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.