Cardano’s Richard Dowell talks through what we have learned so far from the Competition and Markets Authority’s investigation into investment consultancy and fiduciary management services.
The investigation followed a Financial Conduct Authority market investigation reference, prompted by concerns regarding the overall functioning of the industry.
Setting clear objectives would be good for the industry
When considering the current financial health of pension funds, you do have to ask yourself whether the industry is working and producing the desired results. It was not a surprise that the reference was made; for many it was a welcome relief.
Roll the clock forward nine months and we are getting close to hearing the first musings from the CMA. Will they bring in the change many people think is needed?
From the outset, the CMA’s comprehensive issues statement made it clear the watchdog meant business. Eight working papers have since provided the industry with crucial feedback. Across the board, one of the key findings is the need for enhanced transparency – around performance, conflicts of interest, tenders, fees and performance – alongside improved advice and guidance for trustees.
Competition and concentration
While the CMA has deemed both the investment consulting and fiduciary management markets as not being highly concentrated, there are residual concerns around how the market’s composition may change over time. Fiduciary management is a relatively nascent market but, worryingly, it is already showing signs of potential concentration issues in the future.
In many cases, now significant (in market share terms) IC-FM firms, which offer investment consultancy and fiduciary management services, were quite late to providing fiduciary management, yet already constitute a significant portion of total mandates.
The historic buying habit of trustees has shown a bias towards the incumbent adviser. Forty-seven per cent of schemes buying fiduciary management first bought these services from their existing investment consultant, according to the CMA’s survey of pension scheme trustees.
This means that either the IC-FMs have demonstrated above average skill at winning new business, or market testing did not take place.
The CMA needs to conduct further analysis into this issue to assess whether their emerging concern is indeed justified. There are some straightforward tests to be done analysing performance and success rate in tenders given their source.
Of course, any comparison of performance requires a framework that enables trustees to line up and compare apples with apples. We expect that the performance and fees of both fiduciary managers and investment advisers will likely be a major focus for the CMA’s recommendations.
Performance transparency and comparability has been an issue for far too long and without much-needed clarity, trustees’ decision-making is made that much harder.
Structure and guidance
In terms of market structure, we do not expect to see a significant shake up of the current status quo. Instead, the CMA may well recommend rules and give guidance on how IC-FMs promote their services to new and existing clients.
A key feature of the industry continues to be the lack of tenders open to a competitive process. Over the past five years, just under a third of trustee boards buying IC services ran a tender or invited proposals, according to the CMA survey. We expect that all future tenders will go through a robust competitive process.
In many cases, the tender process already involves an external third-party evaluator appointed to provide oversight and manage conflicts when selecting an adviser.
Of course, the Pensions Regulator also has a critical role in ensuring trustees are adequately equipped to undertake this process and make informed decisions in the best interest of their members.
Although not stated by the CMA, the Pensions Regulator’s guidance around tenders remains limited in contrast to detailed recommendations for asset-backed contributions, or the appointment of a covenant adviser. We think more can be done by the regulator, and we are looking for good engagement between it and the CMA.
The one part missing from the review so far is the need to set clear liability performance-related objectives.
With clear objectives, it becomes easier to assess whether the ‘sellers’ are meeting the needs of the ‘buyers’. Setting clear objectives would be good for the industry. We hope the CMA will discuss this with the Pensions Regulator, who in turn will provide future guidance to trustees.
The CMA plans to publish a provisional decision report in July 2018. As we await the CMA’s conclusions, the industry should prepare itself for positive change. We are already seeing some baby steps, but more can be done. Keep a close watch – it could be interesting.
Richard Dowell is co-head of clients at Cardano
