The Financial Conduct Authority (FCA) has today confirmed its final decision to refer the investment consultancy and fiduciary management sector to the Competition and Markets Authority (CMA).
The market investigation reference to the competition watchdog is the first of its kind, and follows the FCA's provisional decision after its interim Asset Management Market Study in November 2016 highlighted issues about competition.
Despite the three largest investment consultants - Mercer, Aon Hewitt, and Willis Towers Watson - in February 2017 offering a package of undertakings in lieu (UIL) to address these concerns, it was provisionally rejected by the FCA in June.
The regulator was not confident that it would provide a comprehensive solution to the adverse effects of competition identified, especially given it would only cover 56% of the market.
Executive director of strategy and competition Christopher Woolard said today:
"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.
"Investment consultancy services play a significant role advising pension fund trustees when they are procuring asset management services. It is important that trustees can be confident they are getting good quality advice and value for money from their investment consultants."
The regulator has the power to make a market investigation reference when it has reasonable grounds to suspect any aspects of a financial services market prevent, restrict or distort competition.
The FCA believes there is a "weak demand side" where trustees rely heavily on consultants but have limited ability to assess the quality of advice, or compare services with resulting low switching rates.
It is also concerned about relatively high and stable levels of concentration with the ‘big three' dominating market share.
Other competition issues include barriers to expansion restricting smaller, newer consultants from developing, while vertically integrated business models create conflicts of interest.
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