Analysis: Investment consultants may not have taken the brunt of the Competition and Markets Authority's recommendations in July, but the industry will have to guard its reputation carefully through what could be a decade of regulatory scrutiny.
After the final report is published in December, the competition watchdog will have six months to implement remedies via an order. That order is set to last for 10 years, unless the effect of the order is incorporated into pensions regulation.
During that time, the CMA has an obligation to monitor the market and check that its remedies are having the desired effect. There is also the danger that other regulators step further into the arena.
“The industry is, in a way, on notice that this is front and centre of the regulatory radar,” said Ian Neale, director at pensions intelligence service Aries Insight.
There’s an imbalance in terms of knowledge. You’ve got a very knowledgeable sell-side and a very inexperienced buy-side
Ian McQuade, Muse Advisory
Moreover, trustees seem supportive of increased pressure on consultants. In a roundtable summary published by the CMA on November 2, some board members criticised consultants who also provide investment products, saying that they “cannot be providing independent advice”.
They also supported the CMA’s recommendation of setting advisers objectives, with assessments linked to the scheme’s own objectives, and consultants reporting on the performance of their recommended managers.
Support for Financial Conduct Authority regulation of the sector was more patchy.
Consultants meeting to stave off CMA
Consultants are attempting to stay one step ahead of these increased requirements.
In October, Willis Towers Watson, Mercer, Aon, Cardano, KPMG, Momentum, Redington, and River and Mercantile announced they would meet to consider how allowing schemes to compare performance and costs with peers could help them assess value for money in their advice.
Pensions Expert can further reveal that JLT Employee Benefits, Hymans Robertson and Barnett Waddingham will attend the meeting, to be held before the CMA final decision is published. Of the major consultancies, only XPS Pensions confirmed it will not take part, while LCP could not be reached.
Ian McQuade, director at governance specialists Muse Advisory, welcomed these steps. Despite the difficulties of disaggregating advice from execution, “some sort of benchmarking, some sort of peer-group analysis, would really help”, he said.
He said that while it is positive to see consultants acting to uphold the industry’s reputation, they must also be prepared to “call out” examples of bad practice still evident in the industry.
McQuade is familiar with one consultant already keeping a model portfolio of its recommendations, but he also has experience of a scheme whose hedge fund allocation was over-diversified between managers to the benefit of no one, except possibly the consultant picking up commission.
He also said that it is right that the response has been to focus on how trustees assess value for money rather than introduce arduous regulations for consultants: “Clearly the buy-side is a disengage market, there’s an imbalance in terms of knowledge. You’ve got a very knowledgable sell-side and a very inexperienced buy-side.”
Market is becoming more concentrated
However, while industry leaders in investment consultancy discuss the best ways to preserve their reputation and avoid further interventions by the competition regulator, their – or their parent groups’ – desire for scale in the pensions market could see them hamstrung.
Mercer parent Marsh & McLennan bought Jardine Lloyd Thompson, parent of the eponymous employee benefits and pensions administrations businesses, in September, raising the prospect of the largest three companies controlling more than half the market.
The CMA repeatedly cited the fact that the big three controlled less than half of the market as evidence of competition in its provisional decision.
Tej Dosanjh, director at CEM Benchmarking, said further concentration could worsen the outlook for competition in the fiduciary market, if the lack of second-tier consultancies means less independent oversight and alternatives to the larger companies promoting fiduciary management.
“Some of them don’t offer fiduciary management services, so they still act as advisers. If they disappear they you really are left with the big three,” he said.
