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UK regulator confirms competition inquiry for investment consultants

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UK investment consultants will be scrutinised by the country’s competition watchdog after the Financial Conduct Authority (FCA) today confirmed its decision to refer the sector for a full inquiry.

The FCA first raised concerns about competition in the investment consulting and fiduciary management sectors in November in its Asset Management Market Study (AMMS). Today the financial regulator said it had asked the Competition and Markets Authority (CMA) to launch a full investigation, the first time it has made such a referral.

The regulator wants the CMA to assess the demand dynamics, which it said were “weak”, with pension trustees “relying heavily on investment consultants but having limited ability to assess the quality of their advice or compare services”.

Other areas of concern for the FCA are barriers to entry and expansion in the sector, and business models that create conflicts of interest, particularly in relation to investment consultants also providing asset management services.

The CMA will also look at the market share held by the three largest providers: Aon Hewitt, Mercer, and Willis Towers Watson.

“We urge the CMA to be mindful of the need for any investigative measures to be proportionate and timely to prevent avoidable costs or uncertainty for schemes during its review.”

Caroline Escott, PLSA

These three firms joined forces following the FCA’s interim AMMS report in November last year, proposing a number of “undertakings in lieu” to improve standards in the sector without the need for a CMA referral. However, the FCA moved to reject the proposals in June when publishing its final report, saying the ideas were not comprehensive enough to address the regulator’s concerns.

In a statement today, Christopher Woolard, executive director of strategy and competition at the FCA who led the AMMS, said: “It is a significant step for us to make this recommendation. We have serious concerns about this market and believe that the CMA is best placed to undertake this work.

“Investment consultancy services play a significant role advising pension fund trustees when they are procuring asset management services. It is important that trustees can be confident they are getting good quality advice and value for money from their investment consultants.”

The UK trade body for pension funds supported the FCA’s stance, despite recent research showing most trustee boards were happy with the services being provided by consultants and fiduciary managers.

Caroline Escott, policy lead for investment and defined benefits at the Pensions and Lifetime Savings Association, added: “Nonetheless others have expressed concerns about the potential misalignment of incentives in the sector and the FCA’s studies have highlighted competition issues on both the demand- and the supply- side.

“We hope that the CMA investigation can examine these issues in depth and recommend comprehensive solutions. We do however urge the CMA to be mindful of the need for any investigative measures taken to be proportionate and timely to prevent avoidable costs or uncertainty for schemes during its review.”

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