CMA Investment Consultants Market Investigation

Following the Competition & Markets Authority (‘CMA’) review of the Investment Consultancy Market, on 18 July 2018, it has provisionally proposed some changes that it believes will improve competition and help trustees gain more information to make more informed choices, and get a better deal from investment consultancy and fiduciary management services. The CMA has proposed the following key changes, which has consulted on before making any final decisions:

• Mandatory tendering for moving into fiduciary management. For those who already have it, but did not tender, they must also do so within five years.
• Mandatory warnings when selling fiduciary management.
• The Pensions Regulator to provide new and improved guidance for pension schemes when tendering for investment consulting or fiduciary management services.
• Better information on fees (for fiduciary management only) and standardised performance reporting (both advisory and fiduciary management).
• Trustees will be required to set their investment consultant strategic objectives and firms must report against these.
• Regulation of investment consulting and fiduciary management services by the FCA.

These changes are a good way to encourage more competition and ensure that trustees have access to better information when making choices. In particular, the mandatory requirement for a tender of fiduciary management services will reduce the competitive advantage that investment consultancies have. They will also need to provide explicit warnings that they are marketing their own fiduciary offering, and that others are available. The unintended consequence of this regulation maybe that investment consultancies with a fiduciary management service will be reluctant to offer fiduciary management services, if there is a risk of losing the client, given the significant set up costs incurred when onboarding a client. However, this should encourage these firms to improve the quality of their service in order to ensure they have the best chance of retaining clients that consider fiduciary management. Those firms that already provide fiduciary manager reviews are at an advantage as they have expertise to scale up this side of the business, but those not previously involved may consider this as an opportunity for adding new services. From a trustee's perspective, it should help to give them a better understanding of the fiduciary management market in order to make a more informed decision when choosing a fiduciary manager. However, the cost of running such an exercise can be expensive and at the moment and there are only a handful of firms that offer a review of fiduciary managers. Therefore, it may prove challenging for some schemes that have a limited budget. The CMA should consider this before any details are made final as it could force some schemes to rule out fiduciary management altogether, on the grounds of cost of conducting a review of different providers, even if it could be the best option for them. Greater guidance from The Pensions Regulator is welcomed to help trustees make more informed decisions when tendering for investment or fiduciary management services. We believe that this will be helpful to trustees in getting the most out of the tender process, especially for smaller schemes who may have limited experience of running such exercises. Our view on better transparency on fees charged by fiduciary managers is that, it will help trustees understand what they are paying for to assess value for money but also could allow comparison between different providers to be easier. This could form a good basis of negotiation for trustees. The requirement to standardise reporting of performance should help trustees to make easier comparisons of consultancies and fiduciary managers. The requirement for trustees to set objectives for investment consultants will mean there is a measureable approach when assessing the performance of the investment services that are provided. This now gives trustees a good way to assess the performance of their investment advisor to see if they are doing a good job, and potentially makes it easier to make comparisons between advisers. The Pensions Regulator will have responsibility for setting guidance on objective setting and we are supportive of this, to encourage investment consultants to improve the quality of the services they provide. The CMA consultation on these proposals closed on 24 August 2018 and the deadline for its final report is 13 March 2019. Overall, we are supportive of the CMA’s drive to increase competition as well as increasing the level of transparency among investment consultants and fiduciary managers, in order to provide pension schemes with better outcomes. However, this will need to balanced with a sensible approach and avoid any unintended consequences for pension schemes.