CITY watchdog the Financial Conduct Authority has asked the Competition and Markets Authority to investigate competition levels in investment consultancy and management services, the first time it has used new powers which came into force in 2015.
The FCA has the power to use a device known as a Market Investigation Reference (MIR) when it has reasonable grounds to suspect that features of a financial services market “prevent, restrict or distort competition”.
Assets of up to £1.6 trillion can be affected by advice from investment consultants in the country’s 12 largest firms.
The watchdog said its concerns about investment consultancy and fiduciary management services concerned a “weak demand side”, where pension trustees relied heavily on consultants but had limited ability to assess the quality of their advice or compare services.
Relatively high levels of concentration and stable market shares were another worry, with the three largest firms in the sector holding between up to 80 per cent of the market share. It said there were also barriers to expansion which restricted smaller, newer consultants from developing their business, as well as vertically integrated business models creating conflicts of interest.
The regulator said institutional investors who used investment consultancy services were mainly pension schemes, but also included charities, insurance companies and endowment funds.
An interim report on its asset management market study, published last November, outlined its provisional decision to make a MIR.
In response, the three largest investment consultancies – Aon Hewitt, Mercer and Willis Towers Watson – offered a package of undertakings in lieu (UIL) to address those concerns.
The FCA said the three firms held at least 56 per cent of the advisory market and 80 per cent of the market based on assets held by clients.
While it welcomed the proposals they put forward in the UIL, it was not confident the package “would provide a comprehensive solution to the adverse effects of competition identified”, and launched a provisional review alongside its asset management market study final report, published in June. This called for new powers to regulate investment consultants amid competition concerns.
As a result of this further consultation, the FCA has decided to reject the UIL and make a MIR to the competition watchdog.
Christopher Woolard, executive director of strategy and competition at the FCA, 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.”
Caroline Escott, from the Pensions and Lifetime Savings Association (PLSA) welcomed the MIR, and added:“Investment consultants can play a positive role in the institutional investment chain, and many PLSA members have told us they are happy with the services offered by their investment consultants.
“Nonetheless, others have expressed concerns about the potential misalignment of incentives in the sector and the FCA’s studies have highlighted competition issues on both the demand – and the supply – side. We hope the CMA investigation can examine these issues in depth and recommend comprehensive solutions.”
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