Investment consultants’ dual role as distributors of and competitors to fund management businesses will be a key plank of the Competition & Markets Authority (CMA) probe of the sector, the agency has said.
In a statement laying out the scope and timeline of its investigation, the CMA said it expects to deliver its finalised report into the sector by March 2019. An interim report remains undated.
The Financial Conduct Authority formally referred the industry to the CMA this month, after proposing it should be bought into the scope of consumer regulation.
The probe will primarily examine consultants’ role in shaping the UK’s £2.1 trillion pension industry.
The CMA highlighted the sector’s potential to distort the fast-growing market for fiduciary services, where it both acts as an intermediary and competitor to fund houses, as a specific area of interest.
Chair of the CMA group investigating the industry John Wotton said: ‘It is extremely important that the investment consultancy sector works effectively for its clients, which include many of the UK’s biggest pension funds, and we want to ensure we are looking at the right issues.
‘That is why we are urging people to get in touch if they have any evidence to share or views about whether these are the correct areas for us to be investigating.’
Consultants may also have a potential conflict with the fund industry in the design and launch of pension portfolios, for instance when they run their own master trusts, and when their ultimate owner provides actuarial and other services to pension funds.
‘There is therefore a considerable degree of vertical integration within the markets referred and other areas of the pension sector,’ the CMA noted.
While the sector remains a relatively small part of the UK’s investment ecosystem, with £240 million spent on their services in 2015, the scale of the UK’s pension savings means that any market distortion would have an outsize impact on outcomes.
The FCA’s decision to refer the industry was made after its research found that the business was not able to consistently identify managers able to offer above-average returns.
‘We are considering whether to extend this analysis, for example by updating it to include 2016/2017 data and including “negative” recommendations and we welcome views on whether this is necessary and likely to be informative,’ the CMA added.
‘We may also seek to examine the selection methodologies of investment consultants to determine how they formulate their recommendations and the factors they take into account.’