CMA begins consultant investigation as FCA calls trustees 'weak'

The CMA has now begun to request information from companies, and will run a bespoke market survey and economic analysis before its conclusion deadline in March 2019.

The decision to investigate was seen as all but certain by many in the industry, particularly once the FCA had rejected undertakings in lieu of an investigation from the sector’s three largest firms: Willis Towers Watson, Mercer and Aon Hewitt.

If they don’t know how to challenge then they haven’t had enough advice from the adviser

Danny Vassiliades, Punter Southall

Further details of the investigation's scope will be set out soon in an issues statement from the CMA. The FCA’s case for referral outlined concerns including concentration and stable market shares for the ‘big three’ firms, barriers to expansion for smaller firms, and vertically integrated business models creating conflicts of interest.

It also identified a “weak demand side”, where pension scheme trustees are limited in their ability to challenge and assess the quality of the advice on which they are dependent.

No opposition from industry

The decision was mostly welcomed by the industry. Willis Towers Watson announced the company’s intention to work with the markets watchdog to “help bring clarity and consistency” to the industry.

Support is unsurprisingly stronger among smaller consultancies, although some have questioned the lack of competition cited by the FCA.

James Trask, partner at consulting firm LCP, said: “While we don’t believe a perceived lack of competition or concentration among the largest firms has in any way prevented clients from coming to us, we believe it is vital that the end users of investment consultancy services can have trust in the industry.”

“Sunlight is the best disinfectant,” agreed Transparency Task Force founding chair Andy Agathangelou, who said he hoped that the investigation would put an end to consultants “capitalising on the asymmetry of information between them and their clients”.

Can you measure advice quality?

The CMA may find it difficult to create a standardised framework for the assessment of consultant performance in the way the FCA is doing with asset manager fees, due to the subjective nature of that assessment.

“If you’ve got a scheme that has little or no hedging, is that the fault of the investment consultant?” asked Jonathan Reynolds, a client director at professional trustee company Capital Cranfield.

“There are so many variables that I think it’s very difficult to say, ‘Well, that’s just inefficient investment consultancy’.”

But Agathangelou said it was “perfectly possible” to develop performance metrics to assess performance, pointing out the example of training organisations measuring improvements in performance outcomes for their clients.

“At the moment the [pensions] industry is woefully bad at doing it. Why? Because there simply has not been any scrutiny,” he said.

Nonetheless, many expect the investigation to take a different approach, for example by requiring retendering exercises, a feature of the undertakings in lieu rejected by the FCA.

If 91 per cent of investors have not switched consultants in the past five years, “then I think something has gone wrong there,” said Danny Vassiliades, managing director of Punter Southall’s investment consulting arm.

Conflicts of interest and a lack of competition are most keenly felt in the fiduciary management business. Large consultancies are sometimes accused of ‘flipping’ clients from a traditional consulting relationship to a far more lucrative fiduciary management mandate.

“At one extreme they could just say that anyone offering fiduciary advice has to have that in a separate company from the consulting arm,” said Vassiliades. “Whether they’ll go that far or not, I doubt.”

Demand side to be improved

Trustees are unlikely to escape the CMA’s notice during the investigation, and further initiatives could be brought in to boost levels of expertise.

Caroline Escott, investment and defined benefit policy lead at the Pensions and Lifetime Savings Association, said boards do occasionally identify gaps in their capabilities, but the role of the lay trustee was safe.

“It’s very possible without any mandating professionalisation,” she said. “There are lots of different sources for guidance and understanding that all kinds of trustees from all kinds of different schemes can access.”

A weak demand side is unlikely to be the fault of the trustees in the first place, according to Vassiliades. “If they don’t know how to challenge then they haven’t had enough advice from the adviser,” he said.