The regulator announced today it would be making a recommendation to the Treasury as part of the publication of the final findings of its asset management market study.
The FCA stated: “We have identified concerns in the investment consulting market. These include the relatively high and stable market shares for the three largest providers, a weak demand side, relatively low switching levels and conflicts of interest.
“We are recommending that the Treasury considers bringing investment consultancy services into the regulatory perimeter.
“We do not currently regulate the asset allocation advice provided by investment consultants and employee benefit consultants.
“This means we are not able to set performance standards or assessment criteria for this advice. We also have limited authority to ask industry to develop ways to measure and assess advice themselves.”
Bosses reported the regulator had found “significant differences in both the behaviour and outcomes of different institutional investors”.
The report said: “A number of, typically, large institutional investors are able to negotiate very effectively and get good value for money.
“However, we also see a long tail of smaller institutional investors, typically pension funds, who find it harder to negotiate with asset managers. These clients generally rely more on investment consultants when making decisions.”
The FCA also said that it found competition was being “adversely affected” in the institutional advice market by a weak demand side, persistent levels of concentration, high barriers to entry and vertically integrated business models.
It said: “We consulted on making a market investigation reference to the CMA to further investigate the investment consultancy services. The three largest investment consultants provided undertakings in lieu (UIL) of the reference, which offer commitments to disclose charges and performance.
“Whilst we welcome the UIL proposals submitted, we have provisionally concluded that we cannot be confident that the UIL would provide as comprehensive a solution as is ‘reasonable and practicable’ in addressing the features we have identified which may prevent, restrict or distort competition in the investment consultancy services.
“We have written to the firms indicating that we are proposing to reject these and are seeking views from other interested parties on this proposal.
“We expect to make a final decision on whether to make a market investigation to the CMA in September 2017.”
Dan Mikulskis, head of defined benefit pensions at Redington, one of the UK's largest investment consultants, said on regulation: "In our response to the original consultation we indicated that we were in favour of bringing investment consultant’s advice under the FCA perimeter, we continue to believe this is warranted given the impact of advice that consultants give particularly in the areas of asset allocation and risk management. We hope that any regulation here would look to ensure advice is placed in the context of each client’s objectives, constraints and risk tolerance."
Richard Dowell, head of clients at risk and investment consultancy Cardano, said: “We welcome action from the FCA on bringing the consultancy market into the FCA’s regulatory perimeter and a strengthening of the duty of care on asset managers. However, we see the findings of the FCA’s asset management market review as a missed opportunity in some areas.
“The final report outlines a number of critical issues that the sector needs to get right for the benefit of trustees and their members; particularly in regards to competition, value for money and performance measurement.
“However, there are only a few firm recommendations on how these areas can be improved. In many ways, the anticipation of FCA action has been more effective in shaping the industry than the final report itself.”