FCA refers investment consultants to competition watchdog over ‘serious concerns’

FCA refers investment consultants to competition watchdog over ‘serious concerns’

The UK’s Financial Conduct Authority (FCA) has referred the pension investments consultancy sector to the Competition and Markets Authority (CMA), the FCA announced today.

In a statement, the regulator pointed out that “assets affected by investment consultants’ advice are significant, with up to £1.6tn of assets affected by the advice of the 12 largest firms”.

It is the first time that the regulator has used its powers to request a market investigation reference (MIR) by the anti-trust body the CMA since it was accorded those powers two years ago, and comes after repeatedly expressing concern that the industry might be operating in such a way as to “prevent, restrict or distort competition”.

An area of concern, said the FCA, is that the largest consultancies, the so-called ‘Big Three’ – Aon Hewitt, Mercer and Willis Towers Watson – between them account for 50-80% of the market.

That was just one of the aggravating features listed by the FCA, with the others being:

  • A weak demand side with pension trustees relying heavily on investment consultants but having limited ability to assess the quality of their advice or compare services with resulting low switching rates
  • Barriers to expansion restricting smaller, newer consultants from developing their business
  • Vertically integrated business models creating conflicts of interest

Some will see this as a sign of the FCA resorting to tough measures, having raised concerns previously, notably in an interim report on its asset management market study published in November 2016.

This report confirmed that it was minded to refer the sector to the CMA by way of an MIR.

In response, the so-called ‘Big Three’ acted to attempt to avoid this measure by offering the FCA a package of undertakings in lieu (UIL) of the MIR “to address its concerns”.

The FCA today formally rejected the UIL after provisionally rejecting it in June, saying that it could not be confident that the undertakings addressed or would resolve the areas of concern that it had highlighted.

Christopher Woolard, executive director of strategy and competition at the FCA (pictured above), said: “It is a significant step for us to make this recommendation. We have serious concerns about this market and believe that the CMA is best placed to undertake this work.”

Commenting on the move, head of defined benefit pensions at investment consultancy Redington Dan Mikulskis said that he welcomed the move as it would give clear guidance and focus for the industry, which would provide “focus on ensuring that competition is working effectively for end customers”.