Industry-led proposals to minimise conflicts of interest in investment consulting have been rejected by the Financial Conduct Authority, bringing firms a step closer to investigation by the Competition and Markets Authority.
In the final report of its asset management market review, the FCA revealed that the three largest consultancies – Willis Towers Watson, Mercer and Aon Hewitt – had presented “undertakings in lieu” in an attempt to head off the referral.
Subject to the provisional CMA reference, the regulator will ask the Treasury to include investment consulting in the FCA's remit.
Our thinking is that if we were to accept [the undertakings in lieu of the big three consultancies], it would only be partial market coverage
Mary Starks, FCA
Conflicts of interest among advisers, in particular the financial motivation for consultants to ‘flip’ clients into fiduciary management mandates, are a major source of concern for pension schemes and regulators.
Disclosure of fiduciary performance and fees, alongside regular tendering exercises for all investment consulting contracts, were included in the UILs submitted by the 'big three' firms.
Promises were not enough
The draft standards also promised that the companies would provide detailed information for the comparison of their manager recommendations with comparable mandates, and that they would maintain a policy on hospitality practices.
But the proposals were not enough to persuade the FCA, which will now pursue a more comprehensive solution to the flaws it raised in the study.
Mary Starks, director of competition at the watchdog, said that while the submissions were “thoughtful”, they did not remove the impetus for an in-depth investigation across the consulting and fiduciary market.
The three firms revenues account for 56 per cent of the market, and their market share increases if clients' asset size is factored in.
“Our thinking is that if we were to accept that, it would only be partial market coverage,” said Starks.
The rejection must now be subject to industry consultation, which will close on July 26.
Andrew Kirton, global chief investment officer at Mercer, said he was not surprised by the final report, but that he thought the undertakings were robust and competitive.
“They still feel they don’t have a good enough understanding of the industry… to say that all of the concerns have been effectively addressed, and in that sense it’s a bit disappointing,” he said.
He said the FCA could have accepted the proposals, which would have resulted in more than half of the DB client base going to tender within five years, subject to full industry participation.
Focus on fiduciaries
While Kirton was happy with consultancies offering fiduciary management where conflicts are managed, others were more suspicious of vertically integrated business models.
Dan Mikulskis, managing director and head of defined benefit at consultancy Redington, welcomed the recommendation that all consultants are brought within the same remit.
He said that mandatory tender requirements could boost transparency, but that “the concern there is whether there is always the right level of competition when the mandate gets awarded”.
Others were disappointed with the FCA’s focus on the practices of fiduciary managers who previously operated as investment consultants, rather than the whole market.
“I think the key area around transparency is over performance measurement and it’s ensuring that all fiduciary management firms adhere to a clear standard,” said Richard Dowell, head of clients at fiduciary manager Cardano.
Meanwhile Danny Vassiliades, managing director at Punter Southall Investment Consulting, expressed frustration with the length of the consultative process: “There doesn’t seem to be many concrete actions coming out of it.”
Time to consolidate
Trustee boards did not escape the scope of the FCA’s proposed remedies for the pensions system.
The regulator will ask the Department for Work and Pensions to address barriers to scheme consolidation and pooling for both defined contribution and DB schemes, in order to boost governance capabilities on trustee boards.
No all-in fee for asset management firms
Asset management firms must disclose estimated and actual fees and transaction costs to clients, but should not be forced to charge a single fee for services, the Financial Conduct Authority has recommended.
It did however recognise potential difficulties arising from full DB consolidation.
“What’s beginning to evolve is essentially a binary decision for some funds,” said Patrick Disney, managing director of fiduciary manager SEI, saying the search for better outcomes was leading trustees to ask, “Do you merge, or do you hire an aggregator who gives you the benefits of merging?”
Neil McPherson, managing director at professional trustee firm Capital Cranfield, was not convinced fiduciary management would help in this respect. “I’m not sure how fiduciary management is an answer to consolidation,” he said.
He welcomed the decision to involve the DWP in promoting consolidation, but warned that the complexity of merging DB funds meant it was “no silver bullet” to scheme underfunding.
He said that less disruptive solutions, such as pooling, could already be achieved and were only being held back in practice by vested industry interests and government-created complexity in DB rules.
