Consultants enquiry: Industry pushes back at CMA proposals [updated]

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Fifteen companies and trade bodies have responded publicly to the Competition and Markets Authority’s (CMA) opening consultation regarding its enquiry into consultants and fiduciary managers.

They variously argued for regular tendering of contracts, better and broader disclosure of fees and performance, and even the full separation of fiduciary and investment consulting services.

However, respondents also laid out a range of difficulties that they predicted the enquiry would face if taking a simplistic approach to any of these issues.

Among the groups responding were JLT Employee Benefits (which provides both investment consulting and fiduciary management services), SEI, BlackRock, Schroders, Legal & General, the Pensions and Lifetime Savings Association , the Society of Pension Professionals, and the Investment Association.

The CMA’s full Statement of Issues paper was released in September and is available here .

Conflicts of interest

“We have concerns about conflicts of interest in fiduciary management, which is increasingly offered by investment consultants and fund managers. These issues are exacerbated because investors cannot assess whether the advice they receive is in their best interests.”

– FCA’s Asset Management Market Study

Asset management trade body the Investment Association (IA) claimed that moving from an advice-based relationship with a consultant to an implementation-based one was “the most serious potential conflict of interest”.

Fiduciary management, the IA claimed, was “dominated” by investment consultants that had won business without a competitive tender process.

Opinion was split among the respondents as to whether there should be stronger rules around providers offering both investment advice and implementation – one of the main reasons for the Financial Conduct Authority’s (FCA) initial involvement in the sector.

Jude Bennett, BBS

Jude Bennett, BBS

“While there are arguments that can be used to support investment consultants providing such services, on balance we would support the separation of consultancy and what are de facto asset management services,” said Jude Bennett, director at BBS Consultants & Actuaries.

He added that fiduciary services could be reclassified as a product that could not be recommended by the same firm offering the service.

SEI, a fiduciary provider, has long supported such a split and used its response to the CMA’s consultation to do so again. The “incumbency advantage” enjoyed by the “big three” investment consultants of Mercer, Aon Hewitt and Willis Towers Watson was “something that SEI has had to work very hard to overcome”, the company said.

However, JLT Employee Benefits’ chief actuary Phil Wadsworth warned splitting up businesses would mean “wholesale upheaval” with clients ultimately losing out. Instead, JLT supported a principles-based approach to ensure the separation of business areas within companies.

The IA also voiced its concern that investment consultants could have an unfair competitive advantage given their access to large amounts of data on products and charges. This data could potentially be used to position consultants’ own products favourably in the market, the association claimed.


“The investment consultant market is relatively concentrated and switching rates appear low.”

– FCA’s Asset Management Market Study

The CMA suggested a “mandatory tender regime” for investment consulting and fiduciary services, as well as exploring improvements to the tender process.

Similar measures were put forward by the big three in an “undertakings in lieu ” document sent to the FCA earlier this year in a bid to fend off a full CMA enquiry.

FCA Asset Management Market Study

FCA Asset Management Market Study

BlackRock – which has only recently moved into the fiduciary arena – claimed that the “limited” use of open tenders for such services created “a barrier to new entrants”.

“From our experience, we have seen a number of instances where fiduciary management solutions are not tendered,” the asset manager said. This sentiment was reflected in several other responses.

However, most respondents baulked at the idea of mandatory tendering at set periods, especially for fiduciary managers. Consultancy firm LCP – which does not provide a fiduciary service – warned that the costs of transferring from one provider to another could be significant.

“The direct costs of changing investment consultant to the client are fairly low,” LCP added. “However, there are multiple extra costs for us (and therefore any other consultant) in going through a mandatory tendering process and we are likely to have to pass some of these costs on to clients.”

P-Solve, a fiduciary provider, said all of its new fiduciary mandates awarded by existing advisory clients in the past two years had involved a third-party assessor, which had “gone a long way” to removing conflicts.

However, the group said making the use of a third party assessor mandatory would be “a step too far” as it would reduce the methods of approach available for pension schemes.

BBS said regular retendering should be deemed “best practice” rather than a requirement.

Note: this section previously stated that P-Solve supported the mandatory use of third-party assessors. This was incorrect and has been amended accordingly.

Fee and performance disclosure

“Trustees and employers may not have sufficiently clear and comparable information to be able to accurately and effectively assess and compare investment consultants’ fees and/or the quality of their service.”

– CMA’s Statement of Issues

A big part of both the CMA’s and the FCA’s concerns centred on the transparency and comparability of fees and performance for both investment consultants and fiduciary managers.

John Wotton, Competition and Markets Authority

CMA enquiry chair John Wotton

Most respondents agreed to a greater or lesser extent that better disclosure on all counts was necessary, but they also pushed back against the CMA’s focus on investment returns.

BBS’s Bennett said: “One scheme’s strategy may provide a lower return than another’s, but this may be achieved with a much lower tracking error relative to changes in the valuation of the liabilities – this may be completely in line with the client’s objectives and tolerance of risk.”

Regarding fiduciary management, BlackRock said it was possible to build “standardised, anonymised and consistent calculated performance metrics”, adding that they were working on such a model with other market participants.

The FCA, in its Asset Management Market Study, was scathing in its review of consultants’ manager selection abilities. On average, the FCA said, consultants did not demonstrate an ability to identify outperforming managers for their ‘buy’ lists. However, JLT’s Wadsworth urged the CMA to broaden its assessment of manager selection and warned that the watchdog had “a difficult task” ahead to assess its effectiveness.

On fees, several respondents highlighted work by the Institutional Disclosure Working Group , set up by the FCA to improve cost transparency for asset managers. In addition, the Markets in Financial Instruments Directive (MiFID II) is set to bring in transparency rules.

Next steps

The CMA will begin hearings this month, according to the timeline on its website. More working papers will become available in the next few months, before a provisional decision is published in July 2018. The statutory deadline for the final report is 13 March 2019.

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