The final report in the FCA’s Asset Management Market Study has recommended that the Treasury considers bringing investment consultancy services under its watch.
Currently the FCA does not regulate the asset allocation advice provided by investment consultants and employee benefit consultants.
Vertical integration between advisory and fiduciary services was identified by respondents to the FCA’s interim report as the most serious potential conflict of interest.
Other criticisms included; the remuneration model, offering overly complex services to justify advice, structuring training seminars to sell more services rather than educating trustees in a neutral way, and the impact of gift giving.
In the final report, released on Wednesday, it concluded: ‘We are still concerned about how effectively conflicts are being managed, particularly conflicts that arise from offering both advice and fiduciary management.
‘We have not received any evidence which has changed our view that the competitive process in the market for fiduciary management could be improved.’
It also rejected the ‘undertaking in lieu’ (UIL) provided by Aon Hewitt, Mercer and Willis Towers Watson, following the FCA’s decision to consider referring the sector to the Competition and Markets Authority (CMA) for a market investigation. It will now undergo a consultation until September, when it will make a final decision whether to refer the sector to the CMA.
The regulator found that the three investment consultants earned
at least 56% of the revenues in the advisory market combined, underlining their dominance.
Responding to the report’s FCA regulation recommendation, Aon Hewitt, one of the UK’s big three consultants, said it was business as usual.
Andy Cox, CEO EMEA, Aon Hewitt, said: 'We chose to be regulated by the FCA in 2011 and we extend the principles of this regulation across our whole UK investment practice. This will promote consistently high standards across the industry, although it represents little change for us.’
Tim Giles, head of UK Investment Consulting at the firm said he believed standardised disclosure of a single all-in-fee will help to drive down fund management costs, however he argued it may favour short-term investors over long-term investors, such as pension funds.
Odi Lahav, CEO of Allenbridge, part of independent asset management consultancy MJ Hudson, pressed the point of Brexit and the coming implementation of a multitude of new regulations such as Mifid II and Priips.
He said: ‘It’s encouraging that the FCA has considered some of these regulations and intends to pursue a course of action that will be aligned and compliment those. Nonetheless, the FCA will need to take great care to ensure that it doesn’t damage the UK’s asset management industry.’
One size does not fit all
On the issue of fiduciary management, Lahav was critical of what he defined ‘cookie-cutter client solutions’.
He said: ‘Fiduciary management is not a bad thing, per se, in fact it is a very sensible option for some clients, and it has helped to drive down fees. That said, our research has shown that the conflicts of interest can be significant, highlighted by the sales practices of some investment consulting firms, which one could argue is an abuse of their roles as trusted advisers.
'An investment consultant recommending themselves as the best fiduciary manager (ie asset manager), should not be allowed.’
‘If your investment consultant becomes your asset manager, then you need to hire a new consultant to advise you going forward.’
Dan Mikulskis, head of defined benefit at the UK’s fourth biggest consultant, Redington, argued that it is only right and proper that the industry receives scrutiny, given its ‘privileged position and profound economic and social reach'.
Mikulskis questioned whether the UILs go far enough to address concerns around competition for fiduciary management at the point of sale.
‘We think it is important to draw the distinction between investment consulting firms with “vertically integrated” business models, whereby they are offering both advice and delegated services such as fiduciary management, and those without.’
He cites that Redington made the choice not to offer fiduciary management due to the possible conflicts that can arise in doing so.
Willis Towers Watson (WTW), reiterated its previous support for FCA regulatory oversight and said it is looking forward to collaborating effectively with the FCA and, in the event of a market reference, the CMA.
A WTW spokesperson commented: ‘It is in all our interests to work constructively to continually improve industry practice to best achieve the interests of our clients, and of the end-saver.’
Mercer, the last of the big three, said it hoped to avoid the uncertainty for clients involved in an extended market review by the CMA and would work with the FCA over the coming weeks to resolve their concerns.
A spokesperson added: ‘We believe that the combination of a mandatory tendering regime, performance and fee standards, and conflicts of interest protocols act as a powerful spur to competition.’
Sally Bridgeland, investments chair at the Local Pensions Partnership, actuary and former CEO of the BP Pension Fund said: ‘Increased professionalism of the consulting and asset management industry is important and regulation of investment consultants may help catalyse more professional behaviour, transparency and disclosure of conflicts.'
She added: 'Although the costs are undesirable, many trustees may be more confident in extending the delegations to third parties if they are regulated.'