The CMA has published its provisional report on investment consultants market investigation.

It has identified some competition issues in both the investment consulting and fiduciary management markets, and has put forward a number of significant remedies which could change the dynamics of the industry and allow the introduction of more responsible investment practices.

John Wotton, chair of the CMA’s Investment Consultants Market Investigation, said: “We’re concerned that pension schemes are not currently putting pressure on the market to get the best value for money on behalf of their members. They may lack the information they need to compare competing offers and so could be sticking with their existing investment consultant or fiduciary manager when there are better options available.”

We believe that this investigation is playing an important role in shining a light on this very influential, and possibly least understood, part of pension fund investment sector: investment consultants act as major gate keepers of the UK’s £1.6tn pension fund industry.

The proposals put forward by the CMA should open the door to improving the quality of advice, including the incorporation of environmental, social and governance (ESG) factors. Avenues for influence include:

  • Challenging incumbency practices through the appointment of their first fiduciary manager must run a competitive tender. This would increase competition in the market and reduce the competitive advantage held by the incumbent investment consultant when it comes to getting the new business.
  • Recommendations for new guidance from the pensions regulator, which would provide trustees with more advice on how to choose and scrutinise providers.
  • Fund management firms must provide clearer information on fees and how they have performed for other clients, so that pension trustees have the information they need to make meaningful comparisons between different providers. Of significant interest is the proposal that the government broadens the FCA regulatory scope, to ensure greater oversight of the industry. This would cover fee reporting, performance reporting and the implications of regulatory developments such as MiFID II. The reports states: “We consider that the introduction of MiFID II and the related institutional disclosure working group (IDWG) templates should significantly improve the availability and clarity of such information. Investment consultants can play an important role in assisting trustees in processing and understanding this information. From a competition perspective, this is important in helping trustees to assess the performance of their investments, and therefore the quality of investment advice they receive, and in turn to drive competition between providers.”

This represents a potentially important legislative development as MIFID II is currently being upgraded by proposed EU legislation (24 May 2018) seeking to integrate sustainability into the suitability obligations, including ESG preferences, arising from MiFID II.

Fiona Reynolds, CEO, PRI said: “We welcome the announcement from the CMA. We believe the full suite of investment consultants’ service delivery should be reviewed from an ESG perspective. This includes ensuring ESG issues are a standard part of consulting advice and whether new or additional ESG integrated investment services are needed.”

The PRI’s Investment consultant services review was submitted to the CMA as evidence, alongside contributions from other UK sustainability groups, including Client Earth, UKSIF and ShareAction.

Ms Reynolds added: “The findings of the CMA provisional report - changing the policy and regulatory framework for investment consultants - offers a practical opportunity to explore solutions on both supply and demand side to increasing the coverage of ESG integrated services among their clients. While the investigation is confined to the UK, we are finding that other jurisdictions are following this case with close interest.”