CMA launches market investigation into investment consultants

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On 14 September 2017, the Competition and Markets Authority (CMA) announced that it has launched a market investigation into investment consultancy and fiduciary management services.

The market investigation will be an in-depth 18 month review of the sector, which seeks to investigate “serious concerns” raised by the Financial Conduct Authority (FCA) that the sector may not be working well for consumers. This is the first time the FCA has made such a reference to the CMA. The investigation may result in regulatory reform of the sector and the CMA has wide-ranging powers to propose and enforce remedies.

FCA’s market study

The market investigation reference to the CMA arises from the FCA’s Asset Management Market Study, in which the FCA identified a number of issues within the investment consultancy sector.

The FCA estimates that the 12 largest investment consultants advise on around £1.6 trillion of assets. The institutional investors who use investment consultancy services are mainly pension schemes but also include charities, insurance companies and endowment funds.

The FCA found concerns regarding the sector including:

  • signs that the buyers of investment consultancy services (e.g. pension trustees) may not be best placed to judge quality or value for money of the service they receive
  • evidence of the biggest firms holding a large share of the market. With the top three firms holding a 50-80% market share
  • barriers to expansion restricting smaller, newer consultants from developing their business; and
  • some potential conflicts of interest to the other services offered by a number of firms.

What to expect next

The CMA will begin contacting the main investment consultancies with requests for information. These requests may be very detailed and with short response times. Companies will need to allocate appropriate resources to responding to CMA information requests.

The CMA will also shortly appoint independent panel members to the Inquiry Group and publish a timetable setting out a schedule for the various stages of the investigation. The appointed Inquiry Group act as the decision makers and are chosen from the CMA’s panel members, who come from a variety of backgrounds, including law, economics, accountancy and/or business.

In its “issues statement” the CMA will set out the proposed focus of its investigation. Interested parties (including institutional investors) will be given an opportunity to comment.

Under statutory rules, the CMA will need to conclude the market study by March 2019.

If the CMA finds one or more adverse effects on competition, it has wide-ranging powers to take action including:

  • making recommendations to Government, for example, if the CMA considers legislation is needed
  • requiring consultants to provided standardised performance information to their clients
  • requiring consultants to make their performance and fee information publically available
  • prohibiting certain fee structures
  • improving customer redress mechanisms where funds underperform
  • requiring trustees to periodically review and re-tender contracts with their investment consultants
  • making recommendations to trustees on best practices
  • possibly imposing structural remedies (such as divestments); and/or
  • taking competition or consumer enforcement action in relation to any suspected infringements of competition or consumer law.

A market investigation represents an opportunity to influence future regulation and the shape of an industry. It also provides a way to raise any concerns which smaller firms may have as regards their ability to compete and grow in the market.

The process involves a detailed legal and economic assessment including direct engagement with major suppliers and market participants. The CMA has extensive information gathering powers backed by the ability to issue fines for failure to comply. The outcomes of any market investigation can be potentially very significant for the business models of suppliers and the commercial terms they offer. Firms will no doubt want to be on the front foot armed with appropriate legal and economic analysis to support their position.

The Competition team at Walker Morris has extensive experience in assisting companies involved in investigations by the CMA. If you would like further information on how Walker Morris may be able to assist you, please contact any member of the Competition team listed below.