UK - All external advisers to pension funds, particularly investment advisers, should be more transparent about conflicts of interest between their commercial interests and their fiduciary duties, the Investment Management Association (IMA) has claimed.

In its response to The Pension Regulator's (TPR) consultation on conflicts of interest, the IMA noted many UK-based investment consultants have begun promoting services over recent years which would see investment strategy delegated to them completely, together with manager selection and implementation. 

As part of this "bundled service" the IMA pointed out, consultants have established fund management offerings which are promoted to pension funds in addition to their traditional consulting services.

As a result, the IMA claimed there "should be a clear distinction between when a consultant is giving independent advice and when he is selling his own products and services".

But it claimed there is a "regulatory gap in that there is no body which has oversight responsibility" of investment consultants and there is no guidance on how they should recognise, manage and disclose conflicts of interest.

The IMA said potential conflicts between commercial and fiduciary interests could arise in number of ways, including: 

Commercial interests could provide an incentive for advice recommending further advice and related services It might mitigate transparency in terms of added value It could lead to advice without appropriate accountability or liability - for example poor advice on strategic asset allocation

In addition, the IMA claimed the fund management services offered by consultants normally take the form of manager-of-managers, fund-of-funds or multi-manager products, but when the consultant is offering advice on manager selection there is an "clear conflict of interest" if it is also promoting its own offering.

The IMA also suggested "it is also the case" where an investment consultant is advising a client to consider a multi-manager offering, it might not place the offering as a competitive tender to other providers and instead "will only recommend his own firm's product".

Although the organisation said it "can have no complaint" that consultants have expanded their business to include services previously carried out by asset managers - as competition generally serves underlying customers - it claimed when a consultant is acting as a provider of fund management services it is "no longer the disinterested adviser that unsophisticated trustees might assume it to be". 

As a result, because of a "continued low level of understanding among trustees of the nature and potential damage from conflicts with advisers" the IMA stressed any guidance should place the responsibility for disclosure on advisers, rather than relying on trustees to ask "every pertinent question".

The IMA noted the SYSC 10 provision for disclosure, which asset managers are already subject to, and stated that "we consider all advisers should be subject to the same level of duty and scrutiny". 

"Addressing conflicts should not be seen as something regulated firms do to one standard and others to another. It should be seen as a fundamental characteristic of a fiduciary - and one which is absent should raise alarm bells," the IMA added.

Richard Saunders, chief executive at the IMA said: "Up to now there has been no oversight of investment consultants in areas such as how consultants recognise, manage or disclose conflicts of interest." 

"This is in contrast to regulated financial services firms. It is therefore most welcome that TPR has taken the initiative to develop guidance for trustees to promote greater transparency and to assist well-informed decision taking," he added.

In response to the IMA's claims, Paul Deane-Williams, spokesman for Watson Wyatt, pointed out investment consultants are already regulated by the Financial Services Authority (FSA) and as a result are required to 'Treat Customers Fairly', which among other things, involves complete disclosure. 

In addition, Watson Wyatt highlighted as individual consultants are governed by either the Institute of Actuaries or the CFA, depending on their qualification, they are "double regulated" and highly transparent as the management of conflict of interest and client care is part of compliance with the codes set down by these bodies.

The firm claimed its approach to dealing with conflicts of interest or perceptions of conflicts is through "comprehensive disclosure with individual clients", as they are an "inevitable part of doing business in financial services and other industries". 

But Deane-Williams admitted: "In some cases they are easier to manage than others. In our case, we are an independent firm, and so arguably have fewer conflicts to manage."

"Ultimately, it is for clients to decide if they believe a conflict is such that it prevents us from delivering appropriate advice to them, and there is sufficient choice in the market place for them to consider other options if they wish," he added.

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