Government responds to CMA recommendations

In its final report on the Asset Management Market Study (June 2017) (AMMS), the FCA identified concerns in the £1.6 trillion investment consulting market for pension scheme trustees.

As part of its proposed package of remedies, on 14 September 2017, the FCA published its decision to make a market investigation reference (MIR) to the Competition and Markets Authority (CMA) regarding investment consultancy services and fiduciary management services. The reference’s purpose was to address the concerns identified in the AMMS.

On 18 July 2018, the CMA published its provisional decision, and on 12 December 2018, the CMA published its final report.

The CMA found that there are features of the investment consultancy (IC) and fiduciary management (FM) market which, individually and in any combination, restrict or distort competition in connection with the supply and acquisition of IC and FM services in the UK to and by pension scheme trustees.

These features related essentially to a lack of engagement by customers, lack of clear information by which customers could assess their existing and alternative providers of IC and FM services; high barriers to switching FM providers; and the fact that some mixed IC/FM firms could be steering advisory customers towards their own FM services, which combined have an adverse effect on competition (AEC) in respect of IC and FM services.

To address the AECs and resulting customer detriment, the CMA decided that a package of remedies should be imposed consisting of:

• a number of measures to be implemented by a CMA order, and
• recommendations to The Pensions Regulator (TPR), the Department for Work and Pensions (DWP) and the FCA.

Investment Consultancy and Fiduciary Management Market Investigation Order 2019

The CMA published a draft of the Investment Consultancy and Fiduciary Management Market Investigation Order 2019 (the Order) on 11 February 2019. The deadline for providing comments to the CMA on the Order was 13 March 2019.

The statutory deadline for implementing remedial action is 11 June 2019, and it is expected that the Order will come into force by December 2019.

The Order applies to providers of investment consultancy, and fiduciary management services, as well as to pension scheme trustees of occupational pension schemes, although certain types of occupational pension schemes are exempt.

The Order introduces mandatory tendering when pension scheme trustees first purchase FM services, and, for those existing mandates awarded without a competitive tender, mandatory tendering within five years. The CMA has tasked TPR with providing guidance on running a tender process. IC providers must separate marketing of their FM service from their investment advice and remind customers of the requirement to tender in most cases before buying FM services.

Additional features of the Order include fee reporting requirements and performance reporting requirements which will be subject to a minimum standard so that pension scheme trustees will be better able to evaluate and compare performance across multiple IC and FM providers.

Recommendations to TPR, DWP and the FCA

As part of its final report, the CMA made the following recommendations:

• HM Treasury should pass the necessary legislation to extend the FCA’s regulatory perimeter to include all of the main activities of investment consultants.
• TPR should develop guidance to support pension scheme trustees in asking for and using the enhanced information they will be able to access as a result of the CMA’s remedies package.
• The FCA should maintain oversight of the transparency of asset management fee reporting, in order that the progress made by the Institutional Disclosure Working Group is maintained.
• The DWP should pass the necessary legislation to enable TPR to oversee the remedies which impose requirements on pension scheme trustees.

Correspondence published on 12 March 2019 reveals that the DWP, TPR and HM Treasury have each agreed with the above listed recommendations.

The DWP will introduce regulations which put the CMA’s remedies relating to trustees into the main body of pensions law; it intends to produce draft regulations, and consult on these this year, following which the regulations would be brought into force, and replace the Order in 2020.

Over the coming months, TPR will engage with industry stakeholders and the CMA on the development of guidance to support trustees to comply with the new governance requirements to be imposed by the Order. TPR will look to consult on the guidance in Summer 2019.

HM Treasury notes the CMA’s recommendation however, in the context of competing priorities for both the government and the financial services sector, HM Treasury will consider this recommendation and consult in due course.