UK competition authorities are to launch a full-scale investigation into the market for investment consultancy and fiduciary management services.
The Financial Conduct Authority (FCA) announced it was referring the sector to the Competition and Markets Authority (CMA) due to concerns over the state of competition in the industry.
In a strongly worded statement, the FCA pointed to significant concentration in the investment consulting sector.
It claimed that just three consultancy firms – Aon Hewitt, Mercer and Willis Towers Watson – account for as much as 80% of the market.
The FCA highlighted the “significant role” that such firms have in influencing pension fund trustees on where to invest their assets.
Christopher Woolard, executive director of strategy and competition at the FCA said there were “serious concerns” about the market for such services.
“It is important that trustees can be confident they are getting good quality advice and value for money from their investment consultants,” said Woolard.
It is the first time that the FCA has referred an industry sector to the CMA, making what´s termed as a “market investigation reference” (MIR). The FCA gained such powers just two years ago.
The financial regulator can make an MIR when it has “reasonable grounds” to believe that any features of a financial services market prevent, restrict or distort competition.
In the case of the investment consultancy sector, the FCA listed the grounds as:
- A weak demand side with pension trustees relying heavily on investment consultants
- Relatively high levels of concentration and relatively stable market shares
- Barriers to expansion restricting smaller, newer consultants from developing their business
- Vertically integrated business models creating conflicts of interest.
Big three rejection
The FCA said it had rejected a package of measures submitted by the biggest three consultants in the sector, who had sought to allay its concerns. It had first mooted the prospect of raising an MIR on the sector in November last year.
While investment consultants are primarily used by pension schemes, their services are also procured by charities, insurers and endowment funds.
According to the FCA, the advice of the twelve largest consultants affects the management of up to £1.6tn in assets.