FCA rejects Mercer, WTW and Aon undertakings on conflicts of interest and proposes regulation of investment consultants

Mercer, Aon and Willis Towers Watson still face a referral to the Competition and Markets Authority (CMA) over conflicts of interest over their investment consultancy services after the FCA rejected their undertakings in lieu (UILs) of an investigation.

FCA logo new 2 620x430The FCA’s asset management market study final report says there will be a further consultation on whether to refer the ‘big three’ investment consultancies to the CMA, and will make a final decision in September 2017, citing concerns over the relatively high and stable market shares for the three largest providers, a weak demand side, relatively low switching levels and conflicts of interest.

The review also recommends that employee benefits consultants undertaking investment consultancy should be regulated by the FCA.

The regulator has confirmed that it will also launch a market study into investment platforms.

The review, which also includes a package of measures to include fund management transparency, found that pension trustees find it difficult to scrutinise the performance of their fiduciary manager because there is very little public reporting and scrutiny of fiduciary management fees and performance, making it difficult for investors to assess the performance of fiduciary managers and compare them, both at the point of sale and on an ongoing basis. It also found fees and charges disclosure by fiduciary managers are not consistent and comparable. This lack of transparency is likely to make it difficult for pension trustees to manage conflicts of interest when investment consultants also provide fiduciary management, leading to poor outcomes, says the regulator.

The report says more can be done to improve fiduciary management reporting and welcome suggestions raised by respondents. As part of the undertakings in lieu received from the big three EBCs, parties suggested reporting templates covering fiduciary management fees and performance, but the FCA says its provisional view is to reject these, and would expect the CMA to consider these points if a referral is made.

A Mercer spokesman says: “We believe that the combination of a mandatory tendering regime, performance and fee standards, and conflicts of interest protocols act as a powerful spur to competition.

“We believe the package of undertakings offered by the industry will resolve all of the FCA’s potential concerns and hope the FCA uses the consultation period to deepen its understanding of the market and develop conviction that the UILs are a strong response. We look forward to working with the FCA over the coming weeks to resolve their concerns without the uncertainty for clients involved in an extended market review by the CMA.”

A spokesman for Willis Towers Watson says: “We believe the UILs provide a solid foundation on which to build any future work on the investment consulting industry. It is in all our interests to work constructively to continually improve industry practice to best achieve the interests of our clients, and of the end-saver.

“We also note the FCA have confirmed that it will be recommending that Treasury considers bringing investment consultancy services within the FCA’s regulatory perimeter. As we have stated previously, we support this recommendation.”

KPMG head of asset management regulatory change Julie Patterson says: “Today’s report is only the end of stage one and we are now at the start of the rule-making process. The FCA has clearly listened and consulted as today’s remedies are more focused than those proposed in its interim report. It is interesting to note that the FCA’s further investigation on distribution has honed in on platforms which does not fully reflect the whole distribution chain.

“We welcome that the FCA recognises more explicitly the new rules on disclosure of fees and charges coming in under MIFID II and the PRIP KID. It’s important that the industry focuses on implementing properly those new rules for both funds and institutional investors. I’m also pleased to see that the FCA will introduce a sunset clause on the payment of trail commission, which comes several years after the introduction of the RDR, and the ability for fund managers to close the old commission-paying share classes.”

Sackers partner Ian Cormican says: “The FCA has stuck to its guns. The report makes uncomfortable reading for investment consultants who now face a potential reference to the Competition and Markets Authority and a consultation on whether the provision of asset allocation advice should be brought within the FCA’s regulatory perimeter.

“A number of consultants offered undertakings in lieu of the reference to the CMA. While the FCA’s provisional view is that it should reject the undertakings, the cat is out of the bag in terms of what consultants can offer by way of disclosure and conflict management. Trustees are likely to expect their consultants, if they are not already doing so, to comply with the undertakings pending a final decision from the FCA in September 2017.”