Pensions | Competition in the investment consultancy and fiduciary management markets: the CMA’s final decision

Written on 17 Dec 2018

In July 2018, we reported that the Competition and Markets Authority had published a provisional decision in its investigation into competition in the investment consultancy and fiduciary management markets. The CMA has now published its final decision. The CMA’s decision, and the remedies it intends to impose, affect most pension scheme trustees and employers.

What did the provisional decision say?

The provisional decision:

  • noted that investment consultants are appointed to give investment advice, which trustees use to help them to make investment decisions;
  • noted 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;
  • confirmed 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”;
  • identified some competition concerns in the investment consultancy market;
  • identified greater competition concerns in the fiduciary management market;
  • suggested remedies to address those concerns; and
  • invited responses to the provisional findings.

What does the final decision say?

The final decision identifies a number of factors that adversely affect competition in the investment consultancy market. These are:

  • low levels of engagement by some customers”;
  • a “lack of clear information for customers to assess the quality of their existing investment consultant”; and
  • a “lack of clear and comparable information for customers to assess the value for money of alternative investment consultants”.

It also identifies a number of factors that adversely affect competition in the fiduciary management market. These are:

  • investment consultancy firms that also offer fiduciary management services “steering their advisory customers towards their own fiduciary management service“;
  • low levels of customer engagement at the point of first moving into fiduciary management” (evidenced, for example, by the proportion of schemes that tender before making an appointment);
  • 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”; and
  • barriers to switching fiduciary manager” (including time and cost).

What remedies is the CMA going to impose?

To address the concerns in relation to investment consultancy, and increase “the incentives for investment consultants to compete for customers on the basis of fees and/or quality of service“, the CMA is going to:

  • require that trustees set “strategic objectives for their investment consultant so that they are able to judge the quality of their service” and review those objectives at least every three years;
  • require that investment consultants “report the performance of… recommended asset management products and their own investment products” to potential customers “to an agreed set of standards“; and
  • recommend that the Pensions Regulator “provides guidance to pension schemes on running competitive tenders for… investment consultancy services” and on how trustees should set strategic objectives for their investment consultant.

To address the concerns in relation to fiduciary management, and encourage providers “to compete more vigorously for customers on price and quality“, the CMA is going to:

  • require that trustees carry out a competitive tender, approaching at least three providers, “before awarding a fiduciary management mandate of 20% or more of… scheme assets for the first time“, or before increasing a mandate to 20% or more of scheme assets;
  • require that trustees who have already awarded a fiduciary management mandate of 20% or more of scheme assets, without carrying out a competitive tender, complete a tender within five years of the date of the appointment (schemes which appointed a manager more than five years ago will have a two year ‘grace period’ in which to complete a tender);
  • prohibit fiduciary managers from accepting a mandate to which the competitive tendering requirement applies, unless the trustees have confirmed that it was tendered;
  • recommend that the Pensions Regulator “provides guidance to pension schemes on running competitive tenders for fiduciary management… services” covering, for example: the factors trustees should consider, the information to provide to managers to get meaningful estimates of fees, how to assess value for money in tender responses, and best practice in the use of third party evaluators/other advisers;
  • require that firms that offer investment consultancy and fiduciary management services put any material that is marketing fiduciary management services into a separate document, and include prescribed wording to make it clear that they are marketing and remind trustees of the duty to tender;
  • require that fiduciary managers separate out ‘fiduciary management’, ‘asset management’ and ‘all other investment fees’, and provide more information about fees and their impact on returns, with a view to helping trustees to understand: what they pay for their fiduciary management service, what they pay for investment products, and whether those fees are competitive;
  • introduce minimum requirements for fee disclosure (including total fees to be charged each year, one-off fees, and likely costs and exit fees if the trustees decide to change fiduciary manager) when selling fiduciary management services, in order that trustees conducting competitive tenders have access to fee information in a form that will allow them to compare managers; and
  • introduce a standardised methodology for reporting past performance to potential customers, in order to give trustees who are considering whether to appoint a fiduciary manager access to information about a manager’s past performance in a form they can compare with another’s.

How and when will the remedies be imposed?

The remedies will initially be implemented by CMA orders. In terms of timing, the CMA is expected to release draft order(s) for consultation early in 2019. Most of the remedies would then come into effect within six months of the date on which the orders are made, with a view to them being in place by the end of 2019.

Has the CMA made any other recommendations?

The CMA has also recommended that:

  • the Pensions Regulator develops guidance to support trustees “in asking for and using the enhanced information they will be able to access“;
  • the government legislates to allow the Pensions Regulator to “oversee the remedies which impose requirements on… trustees” (for example, the duty to tender);
  • the government legislates to “extend the FCA’s regulatory perimeter to include all of the main activities of investment consultants” (for example, advice on strategic asset allocation or on the suitability of a fiduciary management service is not currently regulated); and
  • the FCA maintains “oversight of the transparency of asset management fee reporting, in order that the progress made by the Institutional Disclosure Working Group is maintained“.

Osborne Clarke comment

Trustees and employers should note the CMA’s decision and follow developments in this area over the next 12 months. Trustees who are considering whether to appoint a fiduciary manager, or considering increasing an existing mandate to 20% or more of the scheme’s assets, should consider applying the CMA’s decision on competitive tendering with immediate effect.