The UK’s ‘big three’ investment consultants have failed in a bid to fend off a formal competition enquiry into their sector.

The Financial Conduct Authority (FCA) confirmed this morning that it planned to press on with referring the investment consulting sector to the UK’s Competition and Markets Authority (CMA), subject to a consultation and approval from the regulator’s board.

The decision came as part of the regulator’s Asset Management Market Study, the final report from which was published today.

In it, the FCA highlighted its concerns about pension scheme trustees’ lack of experience and resource, leading to a high reliance on consultants. It also said trustees were “not able to assess the quality of advice provided by consultants”, and rarely switched between providers.

There were “high barriers to entry and expansion” within the sector and “relatively high levels of concentration and relatively stable market shares among investment consultants, which indicate that competition may not be working effectively in this sector”, the FCA added.

In February, Aon Hewitt, Mercer, and Willis Towers Watson sent the regulator a series of ‘undertakings in lieu’ (UIL), aimed at persuading the FCA that investment consultants could address its concerns without cause for additional regulatory action.

The UIL were made public for the first time today. The three consultancies had proposed:

  • Encouraging schemes to “regularly” put investment consultants’ contracts out to tender;
  • Publishing more information about “highly rated” managers so schemes can assess the credibility of recommendations;
  • Adopting performance reporting and fee reporting standards for fiduciary management services;
  • Adopting measures to reduce the potential for conflicts of interest, especially regarding fiduciary services.

However, the FCA said today that the proposals did not fully address its concerns as they covered only roughly 56% of the market – the three firms’ market share.

It has launched a consultation on rejecting the undertakings – open until 26 July – and will confirm in September whether or not the CMA enquiry will go ahead.

Rejecting investment consultants’ responses

The regulator wrote to Aon Hewitt, Willis Towers Watson, and Mercer, explaining its decision to “provisionally” reject the undertakings. See the consultants’ responses here.

“While we welcome your proposals, we do not consider that we can be confident that the UIL would ‘achieve as comprehensive a solution as is reasonable and practicable’ to any adverse effects on competition that we have identified in investment consultancy services,” wrote Christopher Woolard, executive director of strategy and competition at the FCA.

However, Woolard emphasised that the FCA had not carried out a full study of the investment consulting sector and so was “unable to confirm our understanding of the competition issues”. A CMA review would “enable them to identify all the relevant issues and put appropriate remedies in place”, he said.

Despite the FCA’s move to reject the UIL, Woolard wrote in the letter that several aspects of the consultants’ proposals could address some of the regulator’s concerns. He highlighted the fiduciary cost and performance disclosures, as well as the tendering regime plan in particular.

At a press conference this morning, Woolard added that the UIL would still likely form an important part of any potential CMA work.

Woolard’s letter is available here.

The watchdog also recommended that, subject to the outcome of the potential CMA enquiry, the UK Treasury should bring investment consultants into the FCA’s regulatory scope.


What the consultants said

The big three consultancy firms behind the UIL were pragmatic in their immediate responses to the FCA’s decision, but maintained that their proposals were a strong starting point for the future shape of their industry.

While Mercer said in a statement that the UIL proposals “act as a powerful spur to competition”, it also hinted at continued opposition to a full CMA enquiry: “We look forward to working with the FCA over the coming weeks to resolve their concerns without the uncertainty for clients involved in an extended market review by the CMA.”

Andy Cox, CEO for Europe, the Middle East, and Africa at Aon Hewitt, said he was “looking forward” to opening up the competition discussion to other investment consultants.

“We are confident that the UIL represent best practice and as a firm we intend to adopt the transparency and disclosure elements of them on a voluntary basis,” he said.

Willis Towers Watson said in a statement: “We believe the UIL provide a solid foundation on which to build any future work on the investment consulting industry.”

Redington – one of the fastest-growing investment consultancies in the UK – reiterated its belief that a CMA enquiry was not necessary.

Dan Mikulskis, head of defined benefit pensions at Redington, said his firm needed to consider whether the UIL proposals go far enough to address issues in the fiduciary management sector. However, he urged the FCA to make a clear distinction between those with fiduciary offerings – known as “vertically integrated” firms – and those without.

Smaller firms – which are likely to benefit from improved competition in the sector – were unsurprisingly positive.

Danny Vassiliades, head of investment consulting at Punter Southall, said there was a “clear requirement for remedies to increase competition”.

Odi Lahav, CEO of consultancy Allenbridge, said: “Ensuring that investors have a choice of different types of consultants with different approaches and philosophies is definitely a positive for investors in the long run as one-size-fits-all doesn’t work in a dynamic capital market environment.”

All investment consultants that have commented so far today have welcomed the idea of being regulated, and some have already voluntarily become regulated companies.