The Financial Conduct Authority is to go ahead with a referral of investment consultancy and fiduciary management services to the Competition and Markets Authority following “serious concerns” about competition in the sector.

The regulator has confirmed its final decision to make a Market Investigation Reference (MIR) to the CMA on investment consultancy and fiduciary management services, mostly in the pensions sector.  It is the first time that the FCA has made such a reference to the CMA.

The FCA is concerned about pension trustees relying “heavily” on investment consultants but having limited ability to assess their quality. It is also concerned about the three big firms holding 50-80% of the market and barriers to entry keeping out newer, smaller consultants. It also questions potential conflicts of interest in the sector.

The concerns were flagged up last year by the FCA and also in the recent Asset Management Review.

The FCA has the power to make a MIR when it has “reasonable grounds” to suspect that any features of a financial services market “prevent, restrict or distort competition.”

In the case of investment consultancy and fiduciary management, the FCA considers those features are:
• A weak demand side with pension trustees relying heavily on investment consultants but having limited ability to assess the quality of their advice or compare services with resulting low switching rates
• Relatively high levels of concentration and relatively stable market shares with the largest three firms together holding between 50-80% market share
• Barriers to expansion restricting smaller, newer consultants from developing their business
• Vertically integrated business models creating conflicts of interest.

In the interim report on its asset management market study published in November 2016, the FCA announced it had made a provisional decision to make a MIR. In response, the three largest investment consultants (Aon Hewitt, Mercer and Willis Towers Watson) offered the FCA a package of undertakings in lieu (UIL) of a reference to address its concerns.

Although the FCA welcomed the UIL package proposed, it noted that it could not be confident that the package would provide a “comprehensive solution” to the adverse effects of competition identified. So, alongside its asset management market study final report published in June 2017, the FCA announced a provisional view to reject the UIL.

Christopher Woolard, executive director of strategy and competition at the FCA, 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.”

Assets affected by investment consultants’ advice are significant, with up to £1.6tn of assets affected by the advice of the 12 largest firms. The institutional investors who use investment consultancy services are mainly pension schemes but also include charities, insurance companies and endowment funds.

The move has been welcomed by several organisations. Caroline Escott, a policy lead at the PLSA (Pensions and Lifetime Savings Association), said: “We welcome the decision of the FCA to make a market investigation reference to the Competition and Markets Authority (CMA). Workplace pension schemes have £1.9tn of assets under management in the UK and pension schemes represent 57% of all institutional investments. Both Defined Benefit and Defined Contribution schemes are important users of the services provided by investment consultants, including fiduciary management.

“Investment consultants can play a positive role in the institutional investment chain, and many PLSA members have told us they are happy with the services offered by their investment consultants. 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."