City watchdog refers investment consultants for a competition investigation in the first decision of its kind

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The FCA is concerned that Aon Hewitt, Mercer and Willis Towers Watson hold an excessive market share between them (Source: Getty)

The spotlight is about to turn on the investment consultancy and fiduciary management services industry, as the Financial Conduct Authority (FCA) today announced that it will refer the sector to the competition authority.

This is the first time the FCA will have ever made a Market Investigation Reference to the Competition and Markets Authority (CMA).

The FCA can make these references to the CMA “when it has reasonable grounds to suspect that any features of a financial services market prevent, restrict or distort competition”.

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“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,” said Christopher Woolard, executive director of strategy and competition at the FCA.

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 FCA is concerned that the three largest investment consultants – Aon Hewitt, Mercer and Willis Towers Watson – hold an excessive market share between them, at 50-80 per cent.

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It also believes there is a weak demand side, with pension trustees “relying heavily on investment consultants” but having limited ability to assess the quality of advice.

Up to £1.6 trillion of assets are affected by the advice of the twelve largest investment consultancies, according to the FCA's research.

"In a post-Brexit world we mustn’t underestimate the value to UK PLC of having the best regulated, most transparent and therefore the most competitive financial services market in the world," said Andy Agathangelou, founding chair at campaign group the Transparency Task Force.

The FCA added that pension trustees also find it hard to compare services, resulting in low switching rates.

Barriers to expansion are further restricting smaller, newer consultants from developing their businesses, the watchdog has found.

Meanwhile “vertically integrated” business models, where the larger consultancies offer multiple services to address every step of the advice-seeking process, are creating “conflicts of interest”.

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Not enough

Aon Hewitt, Mercer and Willis Towers Watson had offered the FCA a package of undertakings to address its concerns, trying to prevent a CMA referral.

This was after the FCA announced in the interim report on its asset management study that it had come to a provisional decision to make a referral.

Although the watchdog said it “welcomed” these proposals, it rejected them saying it “could not be confident that the package would provide a comprehensive solution to the adverse effects of competition identified”.

Danny Vassiliades, managing director of Punter Southall Investment Consulting, said:

Several of the undertakings in lieu that were proposed had merit. However, it cannot be right that the future direction, structure and regulation of our industry is driven by its participants. We look forward to the CMA’s findings in due course.

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