CMA referral still likely for advisory firms as FCA consultation closes

The Financial Conduct Authority’s consultation on the undertakings in lieu of a CMA referral closed on Wednesday, with the watchdog already minded to reject them and issue a market investigation reference.

Concerns over competition in consultancy stem from the estimated 56 per cent coverage of the market by Aon Hewitt, Willis Towers Watson and Mercer.

My wish is that the end result focuses in on transparency from the supply side and improved governance on the buy side

Alan Pickering, Bestrustees

The FCA has previously said it wants any improvement in standards to be binding on the entire industry. With a mixed bag of consultation responses, many experts now view the CMA referral as inevitable.

Several consulting firms that spoke to Pensions Expert voiced their open opposition to the UILs, which contained suggestions designed to improve transparency and encourage regular tendering exercises.

“The UILs presented a recognition that something needed to be done to make the industry more competitive, but it’s not really for the people or the firms that the regulator is most interested in to effectively set the rules,” said Danny Vassiliades, managing director of Punter Southall Investment Consulting.

Vassiliades said the CMA could force schemes to review their arrangements, but that a belief amongst trustee boards of large schemes that only ‘big three’ firms can meet their requirements might prevent the policy from having any real bite.

“The biggest funds will have had relationships with the largest consultancies for a long time,” he said. “They may still not be that excited about moving to the mid-tier firms like ourselves.”

However, others doubted whether there are problems with competition in the pure advisory market.

“We don’t find that there’s any real disadvantage in not being one of the big three,” said James Trask, a partner at Lane Clark & Peacock.

Spotlight should shine on fiduciary management

However, Trask expressed greater concern about fiduciary management services being offered by consultancies, an area also highlighted by the FCA in its asset management market study reports.

“The issue is it’s very poorly understood by potential buyers of the service and it’s often promoted without a full disclosure of what the clients are getting into, or without a competitive process,” he said.

The three largest firms agreed in their UILs to have other parties manage a fiduciary management tender process where they are the incumbent consultant, and proposed that they might introduce, but not recommend, their own fiduciary services.

For Patrick Cunningham, co-head of client management at fiduciary manager and investment consultancy Cardano, these promises were not enough.

“I’m sure that the CMA will take into account some of the big three’s ideas,” he said, but added that too many savers were reliant upon the proper functioning of the industry “to forgo the opportunity to have a comprehensive independent review by a disinterested party”.

He cited fiduciary managers including employer contributions in their summary of their impact on a scheme’s solvency ratio as a key marker of a lack of transparency, but stressed that improvements to trustee governance are also necessary.

“To really make the market function well for DB pension schemes, there are things that buyers and buyers’ regulators need to do as well,” he said.

'Fig leaf' consultation?

Consultants have taken a variety of positions on the UILs, according to Caroline Escott, defined benefit and investment policy lead at the Pensions and Lifetime Savings Association, but their input may not affect the outcome of the consultation.

“It certainly feels like, as they said, [the FCA] are minded to reject the UILs,” she said.

She added that consolidation may have a role to play in improving the level of resource available for effective scrutiny of consultants and fiduciary managers.

Alan Pickering, chair of Bestrustees, said that given the tone set by the FCA in the interim report of the market study, the consultation was “something of a fig leaf”, and expected the UILs to be rejected by the regulator.

However, he voiced concerns that the CMA investigation might conflate the retail and institutional markets, and echoed Cunningham’s emphasis on the role of trustee governance.

“My wish is that the end result… focuses in on transparency from the supply side and improved governance on the buy side,” he said.