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 space 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.”

At a press conference this morning, 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 generally associated with the institutional space.

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 incentivised 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
  • 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.

The full paper is available here, and the consultation into the competition review is here.