Watchdog report spares UK investment consultants industry overhaul

14 August 2018 5 min. read

The Competition & Markets Authority (CMA) has ruled out an industry-wide overhaul of investment consulting in the UK, following a protracted process which has seen a number of Britain’s largest pension advisors sweating over the past 30 months. The Financial Conduct Authority (FCA) had referred the industry to the CMA on the back of its own probe, although its recommendations regarding the concentration of the industry have largely been ignored.

The two-and-a-half year saga regarding the regulation of the investment consulting market seems, for now at least, to have come to a close, as the CMA released a report which will have broadly relieved the top names in the industry. Aon HewittWillis Towers Watson and Mercer are the largest investment consultancies in the UK – known in the segment as the Big Three – and collectively control up to 71% of investment consultancy revenues in the nation. The trio had become concerned that they would be called upon to spin off their lucrative fiduciary management divisions, which offer an asset management service, something that critics had labelled a conflict of interest.

The fears stemmed from a damning report last year from the FCA, which noted “serious concerns” about the concentration of the investment consultancy industry, before referring the sector to the UK antitrust authority of the CMA for a competition probe. However, 10 months on, the CMA published its provisional findings into the industry, and ruled out a forced break-up, instead suggesting that such an intervention could lead to increased prices for customers by hurting economies of scale. Instead, the ombudsman suggested a series of remedies, which will remain under consultation until the end of August 2018. These measures are set to feature mandatory tendering of first-time fiduciary management contracts, and the bringing of most services from investment consultants and fiduciary managers under the FCA’s regulatory remit, which the CMA believes will better promote competition in the sector.

Watchdog report spares UK investment consultants industry overhaul

Commenting on the much-anticipated findings, Fiona Dunsire, Chief Executive of Mercer UK, Britain’s largest investment consultant, suggested that the CMA’s provisional decisions showed that the market was not as heavily concentrated as people had made out, while customers were happy with the services they received. Meanwhile, commenting on the perception that the findings had been less stringent than many expected, Ed Francis, Head of Investment for Europe, the Middle East and Africa at Willis Towers Watson, expressed “a sense of relief that some of the more adverse outcomes have been avoided.”

Other players in the UK investment consulting scene include firms such as Barnett Waddingham, Hymans Robertson and Reddington, however, and they, along with smaller players in the sector, are likely to be less impressed by the CMA’s announcement. This aspect of the dispute is another long-running element, as during the FCA’s probe, the Big Three had previously attempted to avoid a full-on competition probe by recommending a set of their own proposals to the FCA at the mid-point of the study. The firms claimed the proposed measured were aimed at improving competition and transparency in the sector, which many criticised for its opaque practices, but the move irked smaller rivals, accusing the threesome of behaving as “poachers turned gamekeepers.”

Underestimating change

In line with this, there were a number of experts who greeted the CMA’s stance with a much less complimentary tone. Instead, they argued, the competition authority should have done more to crack down on bad practices in the sector. Speaking to the UK’s Financial Times, one competition lawyer said there was a “mismatch between what [the CMA] finds to be problematic and the remedies they propose”, before dismissing the CMA’s defence of its decision not to force a break-up, arguing that its economies of scale argument did not make sense.

The source went on to brand the watchdog’s ideas as toothless, stating, “The CMA has just subjected a whole industry to huge costs and a massive burden in complying with all the information requests – and come up with a paper tiger.”

It may not be an ending that truly satisfies anyone, or indeed an ending at all, though. Despite escaping the most strict competition remedies, the largest investment consulting firms also seem to be anticipating that this is the beginning of a larger change in the sector. One Big Three senior figure commented, “I liked the old days when we could get on working with our clients, without too much attention from the media and regulators. I think those days are gone.”

In line with this, Lianne Craig, a Partner at Hausfeld, the law firm, warned the press against underestimating the changes, adding, “These developments are but the first steps in what are likely to be a significantly increased number of investigations undertaken on by the regulators and we fully expect the sector to be subject to a level of scrutiny that it has never before experienced.”