Trustees rely on their investment consultants and, increasingly, their fiduciary managers to provide investment advice and (in the case of fiduciary managers) make investment decisions.
Following an investigation into the investment consultancy and fiduciary management markets, the Competition and Markets Authority has published its final report
. The CMA has found that there is an adverse effect on competition in the investment consultancy market and – to a greater degree – the fiduciary management market from which substantial customer detriment may be expected to result. It has therefore proposed a package of remedies to address these issues.
What has the CMA found?
In investment consultancy, the CMA has found that there is a low level of engagement by some trustees in choosing and monitoring their provider. The CMA also found that it is difficult for trustees to access and assess the information needed to evaluate the quality of their existing investment consultant, and to identify if they would be better off using an alternative provider.
In fiduciary management, the CMA has found that firms which provide both investment consultancy and fiduciary management have an incumbency advantage. This derives from low engagement by trustees at the point of first moving into the service, investment consultants steering their advisory customers towards their own fiduciary management service, and the fact that prospective customers do not have access to comparable information on firms’ historic performance or clarity on their fees. This means that some trustees remain with the firm that is their investment consultant even if a better deal on fiduciary management is available elsewhere. The problem may be exacerbated by the relatively high costs of switching provider. In addition, it is difficult for many trustees to access and assess the information they need on the fees of their existing fiduciary manager, and to identify if they would be better off using an alternative provider.
What remedies are the CMA proposing?
The CMA proposes to introduce the following requirements to address the problems it has identified:
- A requirement for trustees to carry out mandatory tendering when first purchasing fiduciary management services (above a minimum threshold) and a requirement to run a competitive tender within five years if a fiduciary management mandate was awarded without one.
- A requirement on investment consultants to separate marketing of their fiduciary management service from their investment advice and to inform trustees of their duty to tender in most cases before buying fiduciary management services.
- Requirements on fiduciary management firms to provide better and more comparable information on fees and performance for prospective customers, and on fees for existing customers.
- A requirement for trustees to set objectives for their investment consultants, in order to assess the quality of investment advice they receive.
- A requirement on investment consultancy and fiduciary management providers to report performance of any recommended asset management products or funds using basic minimum standards.
The CMA will ask the Pensions Regulator to give greater support to trustees when running tenders for investment consultancy and fiduciary management services, and to provide guidance for trustees to support the CMA’s other requirements.
The CMA is also making recommendations to government to enable the Regulator to oversee the remedies applicable to trustees and to extend the Financial Conduct Authority's regulatory perimeter to include all of the main activities of investment consultants.
What happens next?
The CMA will implement the remedies by way of an order on trustees and firms providing these services. It will consult on the order in early 2019, with implementation of the new requirements expected to be effective later in the year.
What does it mean for trustees?
Ultimately, the changes should encourage trustees to look for cheaper and better quality service. In particular, trustees are likely to welcome the requirements for investment consultancy and fiduciary management providers to provide better and more comparable information on fees and performance.
However, the CMA has placed much of the onus for change on trustees. In particular, the introduction of mandatory tendering will represent a new burden for many.
For more information, please speak to your usual Linklaters contact.