Following an initial investigation by the Financial Conduct Authority (FCA), the provision of investment consultancy and fiduciary management services will now be subject to an in-depth investigation by the UK competition regulator – the Competition and Markets Authority (CMA). The CMA has wide powers to investigate and impose remedies. Industry participants should expect to receive requests to attend and give evidence, and to produce documentation and information to the CMA. Those with an interest in influencing the outcome of the CMA’s investigation should now be working to compile persuasive submissions and evidence to ensure their points of view are given due attention by the CMA.
The key concern identified by the FCA, and now referred for investigation by the CMA, is that the following features of the industry may distort competition between suppliers of investment consultancy and fiduciary management services:
- A weak demand side due to the limited experience of trustees, evidenced by low rates of switching by trustees between consultants
- An inability to assess the quality of advice provided by consultants, exacerbated by the limited availability of relevant data
- Persistent levels of market concentration and relatively stable market shares among investment consultants, with the three largest consultancy firms (Aon Hewitt, Mercer and Willis Towers Watson) estimated by the FCA to control around 60 per cent of the market, with little variation in shares over time
- High barriers to entry and expansion, particularly the inability of smaller or newer consultants to develop their business outside of niche, specialist areas, with trustees attaching considerable importance to brand and preferring well-known established firms
- Vertically integrated business models creating conflicts of interest where in-house fiduciary management and master trust services are recommended by investment consultants, and where investment consultants also provide services to asset managers that they might recommend to trustees