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UK Financial Conduct Authority seeks to regulate consultants

The UK’s Financial Conduct Authority (FCA) is seeking regulatory powers over investment consultants following a damning review of the sector.

The regulator has also called for an investigation by the Competition and Markets Authority (CMA) into the institutional investment advice sector to address what it sees as a lack of transparency and competition among providers.

As part of its asset management market study, the FCA found that clients struggled to assess the quality of asset allocation advice, despite this being the most reliable indicator of performance.

The FCA said in its interim report into the study: “The CMA would be best placed to explore what impact the difficulties in assessing the quality of investment consultancy advice has on competition between investment consultants, the advice they offer and ultimately the returns investors receive.”

The regulator is also “considering recommending” to the Treasury that institutional investment advice be brought within its remit.

“This is a very important part of the asset management value chain that is currently unregulated,” the FCA said.

“Bringing this within our regulatory ambit would not only improve regulatory oversight on this activity, it would also mean we would be in a position to take forward any recommendations put forward by the CMA’s market investigation reference.”

Chris Woolard, director of strategy and competition at the FCA, said small pension funds in particular were vulnerable to a lack of transparency and competition in the consulting sector.

The smallest funds behave “more like retail investors”, he said, rather than the sophisticated buyers associated with the institutional sector.

In addition, the regulator made a number of other critical observations of investment consultants and fiduciary managers, including:

Consultants’ manager ratings are not a good indicator of future performance;
The same ratings can act as “a barrier to entry, expansion and innovation” for asset managers, as smaller or newer firms find it harder to get face time with consultants;
Consultants do not promote competition among asset managers on fees;
Advisers may be given an incentive to recommend their own products or overly complex strategies;
Investors find it difficult to monitor the performance of their consultants and so focus instead on costs, speed of responses and other factors;
Investors struggle to challenge their consultants effectively;
Fiduciary management fees are unclear and inconsistent; and
Some consultants are still accepting gifts and hospitality from asset managers despite previous warnings from the FCA against this practice.

Elsewhere in the report, the FCA said it had found weaknesses in price competition among actively managed funds.

It proposed an “all-in fee” for retail investors, to include all costs incurred by funds, and a strengthening of asset managers’ duty to act in clients’ best interests.

Industry voices on a long-awaited report

daniel godfrey

“If a fund’s objectives are woolly, and it’s hard to get a handle on costs, it’s difficult for the investor. If we can change this, it will make the industry more Darwinian. Then it becomes stronger, with better outcomes for consumers – and it also grows.”
Daniel Godfrey, former chief executive, the Investment Association

“There is a clear requirement for more competition in the investment consulting market. Three large providers dominate the industry. This has a number of negative consequences for pension schemes and the market more widely. We encourage the FCA to consider, in more detail, ways in which schemes can assess the performance of their consultant and determine whether their fees have been justifiable.”
Danny Vassiliades, head of investment consulting, Punter Southall

“The FCA’s analysis and recommendations come at a time when the industry is already taking significant steps to improve investor confidence. Among new measures the Investment Association has put forward is a detailed plan for a new model of charge and cost disclosure, which is acknowledged in the interim report and has been welcomed by all parties.”
Chris Cummings, chief executive, the Investment Association

“[Investment consulting] is a very important part of the asset management value chain that is currently unregulated. Bringing this within our regulatory ambit would not only improve regulatory oversight on this activity, it would also mean we would be in a position to take forward any recommendations put forward by the CMA’s market investigation reference.”
From the FCA’s Asset Management Market Study

con keating

“Either you’re an investment consultant or a fund manager, but you cannot be both. I really do think there should be a clear division between fund management and consultancy services.”
Con Keating, head of research, BrightonRock

“If consultants want to continue offering fiduciary management, the FCA should insist they either divest their investment consultancy arms or ring-fence the conflicting parts of their businesses in the most robust way possible. As recognised, it is the only way to effectively address the conflict-of-interest issue.”
Patrick Disney, managing director, SEI

martin gilbert

“I welcome the FCA’s interim report as it brings focus and an urgency to confronting some key industry issues impacting customers. There is a need for increased transparency in relation to the services provided, the costs of such, and also for ensuring value for money. Asset managers play a vital role in helping investors achieve their financial goals, and the FCA’s proposals will help deliver this. We look forward to working with the regulator and the industry to ensure all investors, large or small, receive the best possible service.”
Martin Gilbert, chief executive, Aberdeen Asset Management

“Pension funds should be able to ask the right questions and need to arm themselves with sufficient expertise to be a proper negotiating partner for the industry, which includes the asset management and investment consultant industry.”
Bart Heenk, managing director and UK head, Avida International

“The UK occupational pension system is fraught with challenges that mainly arise out of the long-term increase of lay people as members of trustee boards. The asset management industry, which services these clients, is therefore a relative beneficiary of some of these governance challenges. I do hope that the regulators grasp the nettle and come up with solutions to improve governance of schemes.”
Elizabeth Renshaw-Ames, CEO, HSBC UK Pension Scheme

“The FCA report is great. It’s taken me seven years to get to the point where, after initial dialogue with the FCA, they’ve been willing to listen again. The problem I have is that the asset management world is extremely complicated – the whole capital markets infrastructure is extremely complicated. Although asset managers sit at the sharp end with the client relationship, they are supporting a complex value chain with a lot of costs that implicitly strip value out of the pot of money. We need to resolve that.”
Christopher Sier, Newcastle University Business School

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