Investment consultancy and fiduciary management – proposed new requirements for UK pension scheme trustees

The Competition and Markets Authority (the “CMA”) has published the provisional decision report in its market investigation into the investment consultancy and fiduciary management services provided to institutional investors, in particular pension scheme trustees. The investigation was launched following a market investigation reference by the Financial Conduct Authority (the “FCA”) about the competitive functioning of the asset management industry, about which the FCA expressed concerns in the final report on its asset management market study. The CMA investigation focused on pension scheme trustees as the main customer group in the investment consultancy and fiduciary management markets.

CMA findings
In its provisional decision, the CMA identifies competition problems in both markets, but considers that these problems exist to a greater degree in the fiduciary management market. Its provisional findings include the following:

• Trustees often have low levels of engagement when appointing and monitoring an investment consultant or fiduciary manager, particularly when appointing a fiduciary manager for the first time. Only a third of trustees use a competitive tender process, meaning that no competitive pressure is put on their existing investment consultant or fiduciary manager to offer the best terms or highest performance.
• Trustees often do not receive sufficient information on fees or service quality to be able to judge whether they are getting good value from their existing investment consultant or fiduciary manager, or if they could get better value elsewhere.
• Around half of pension schemes use the same provider for both investment consultancy and fiduciary management services. The CMA believes that the ability of a scheme’s investment consultant to steer trustees on their choice of fiduciary manager, combined with poor trustee engagement and a lack of access to information on comparative performance and fees, means that providers which offer both types of service have an advantage over other providers in terms of winning fiduciary management business from existing clients. This may mean that trustees use the same provider for investment consultancy and fiduciary management services even if a better deal would be available with a different fiduciary manager.

CMA recommendations
The CMA makes a number of recommendations to deal with its concerns, including the following:

• When appointing a fiduciary manager for the first time, trustees should be required to run a competitive tender process. Where trustees have already appointed a fiduciary manager without running a competitive tender process, they should be required to put the role out to competitive tender within five years.
• Trustees should be required to set objectives when they appoint an investment consultant so that they can better assess service quality.
• Investment consultants and fiduciary managers should be required to provide clearer information on investment performance so that trustees can make meaningful comparisons between different providers. Fiduciary managers should also be required to provide clearer information on fees.
• The Pensions Regulator should publish new guidance for trustees on appointing investment consultants and fiduciary managers.
• The government should give the FCA greater oversight of the investment consultancy and fiduciary management industry.

The CMA’s provisional decision is open for comment until 24 August 2018. The CMA is required to publish its final report by 13 March 2019.