Pensions | Competition in the investment consultancy and fiduciary management markets: the CMA's provisional decision

On 18 July 2018, the Competition and Markets Authority published a provisional decision in its investigation into competition in the investment consultancy and fiduciary management markets.  The investigation follows a reference by the Financial Conduct Authority.  Its outcome will be relevant to almost all pension scheme trustees and employers.

Overview

The CMA's provisional decision:

• notes that investment consultants are appointed to give investment advice, which trustees use to help them to make investment decisions;
• notes that fiduciary management usually involves trustees delegating some or all investment decisions to a fiduciary manager, subject to an investment strategy set by the trustees;
• confirms it is "vital" for competition to work well in the investment consultancy and fiduciary management markets because they influence "pension scheme assets worth at least £1.6 trillion" and so "the retirement income of millions of people";
• identifies some competition concerns in the investment consultancy market;
• identifies greater competition concerns in the fiduciary management market;
• suggests remedies to address these concerns; and
• invites responses to the provisional findings and suggested remedies by 5pm on 24 August 2018.

What does the CMA say about competition in the investment consultancy market?

The provisional decision says that there are some factors that adversely affect competition in the investment consultancy market:

• "Low levels of engagement by some customers" in choosing and monitoring a consultant;
• A "lack of clear information for customers to assess the quality of their existing investment consultant";
• A "lack of clear and comparable information for customers to assess the value for money of alternative investment consultants".

What does the CMA say about competition in the fiduciary management market?

The provisional decision says that there are a number of factors that adversely affect competition in the fiduciary management market:

• Investment consultants that also offer fiduciary management services "steering" existing clients towards their own fiduciary management service;
• "Low levels of customer engagement at the point of first moving into fiduciary management"  (for example, the CMA found that only 34% of customers appointing a fiduciary manager for the first time carry out a formal tender, with this figure falling to 14% where fiduciary management is bought from the existing investment consultant);
• A "lack of clear and comparable information for customers to assess the value for money of alternative fiduciary managers";
• A "lack of clear information for customers to assess the value for money of their existing fiduciary manager";
• "Barriers to switching fiduciary manager"  (for example, "[t]here are likely to be much higher costs and a greater time required to switch fiduciary management provider than investment consultancy provider").

What remedies does the CMA propose?

To help trustees to monitor performance and assess value for money in the investment consultancy market the CMA suggests:

• introducing a new duty for trustees to set "clear and measurable" strategic objectives for their investment consultants every three years, and for consultants to report against those objectives;
• that the Pensions Regulator develops guidance to help trustees to set strategic objectives for their investment consultants;
• introducing basic reporting standards, such that all investment consultants would, for example, need to report on how each of the products or funds they have recommended has performed against benchmark and on return net of fees.

To help to address the concerns identified in the fiduciary management market the CMA suggests:

•  introducing mandatory competitive tendering when trustees appoint a fiduciary manager for the first time. Trustees who have already appointed a fiduciary manager without a competitive tender will also have to conduct a tender within five years of the appointment (or within two years of the date of the CMA's order if later);
• that the Pensions Regulator develops detailed guidance to help trustees to run an effective competitive tender;
• requiring investment consultancy firms that also offer fiduciary management services to give a series of warnings to existing clients when selling fiduciary management services. For example, firms will need to confirm the extent to which written information is advice or marketing.  They will also need to remind the trustees that other providers are available and about the requirement to run a competitive tender;
• requiring fiduciary managers to report 'disaggregated' fiduciary management fees to existing customers by providing regular (at least annual) statements setting out total fees for the period and how these break down between  fiduciary management service fees, asset management fees and other investment fees (for example, custodian fees and administration charges).  As a part this, managers will need to provide fee information about each product and fund and confirm return gross and net of fees;
• introducing minimum requirements for fee disclosure (including costs and exit fees on changing fiduciary manager) when selling fiduciary management services in order to give trustees conducting competitive tenders access to detailed fee information in a form that will allow them to compare managers;
• introducing a standardised methodology and template for reporting past performance to potential clients in order to give trustees who are considering whether to appoint a fiduciary manager access to information about a manager's past investment performance in a form they can compare with another’s.

To support all of these remedies the CMA proposes making some recommendations. These include a recommendation that the Pensions Regulator prepare guidance on engaging with investment consultants and fiduciary managers which includes guidance on the two areas discussed above.

Osborne Clarke comment

The CMA has invited responses to its provisional decision and suggested remedies.  The next step will be for the CMA to consider the responses and publish a final decision.  The final decision will need to be published before the investigation deadline of 13 March 2019.  The CMA can then consult on, and make orders to implement, the final remedies.  The provisional decision suggests that some of the remedies will take effect shortly after a CMA order is made, whilst others will take effect after a grace period or further work.  However, trustees who are considering whether to appoint a fiduciary manager may wish to take the CMA's proposals in relation to competitive tendering into account.  They should also note that the CMA's current view (and one of the points on which it is asking for feedback) is that an open invitation tender is likely to be more effective than a closed invitation one.