The CMA’s Investment Consultancy Investigation: Different market, similar issues…

The UK’s Competition and Markets Authority (the CMA) has set out the scope of its latest market investigation, into investment consultancy services and fiduciary management services. 

The CMA has broad powers to introduce new legal and regulatory requirements to address market failures, as well as making recommendations on actions which should be taken by other bodies (such as the FCA or the government). As such, the investigation could have very significant consequences for businesses providing these services as well as their customers (for example, pension funds). This briefing answers the key questions in respect of the investigation.

27 September 2017

What is a market investigation? 
Market investigations are a special tool available to the CMA under the Enterprise Act 2002 (the EA 02), which allow the CMA to look in a wide-ranging way at how well competition is working in a particular market and to take remedial action to fix any problems that are identified. 

What market is the CMA investigating this time? 
The investigation is looking at the market for two financial service products:

  • Investment consultancy services, meaning the provision of advice in relation to strategic asset allocation, manager selection, fiduciary management to pension schemes and employers in the UK. 
  • Fiduciary management services, meaning the provision of a service to institutional investors (mainly pension schemes) where the provider makes and implements decisions for the investor based on the investor’s investment strategy in the UK. This service may include responsibility for managing all or some of the investor’s assets and may include, but is not limited to, responsibility for asset allocation and fund / manager selection.

The CMA’s opening of the investigation was preceded by an initial market study undertaken by the Financial Conduct Authority (the FCA) (the UK’s financial services regulator). A market study is a less in-depth and interventionist precursor to a full market investigation; if the body undertaking the market study believes there are grounds for a more intensive assessment of the market being looked at they will refer it to the CMA for a full market investigation. The FCA reached this conclusion about the market for investment consultancy services and fiduciary management services. 

What issues with competition does the CMA think may exist? 
In its issues statement, building on the FCA’s market study and other previous investigations, the CMA has identified three broad issues which it plans to explore in the investigation:

  • Whether difficulties in customers’ ability to assess, compare and switch investment consultants mean investment consultants have little incentive to compete for customers.
  • Whether conflicts of interest on the part of investment consultants reduce the quality and/or value for money of services provided to customers.
  • Whether barriers to entry and expansion mean there are fewer challengers to put pressure on the established investment consultants to be competitive – which leads to worse outcomes for customers.

To an extent, despite the very different nature of the markets, these issues are similar to a number of the key concerns the CMA had in respect of the energy and retail banking markets (both of which it has investigated in recent years). A key point of debate will likely be whether the (generally) more sophisticated nature of the customers in this market should make the CMA cleave towards a less interventionist approach (and whether it may be appropriate to protect particular classes of customers in particular ways, as the CMA chose to do in the energy market).

What might the CMA do if it finds that any of these issues are leading to competition problems?
The CMA has broad remedy making powers under the EA 02. Its issues statement has already outlined various kinds of remedies it considers may be appropriate in respect of the potential competition problems it has identified. 

These range from ‘lighter-touch’ measures which, for example, simply seek to improve the information available to customers or recommend better practice to more interventionist steps which would formally regulate important elements of investment consultants’ business practices or even require some firms to divest parts of their business.

Who should be interested? 
The investigation will clearly be of interest to firms which provide investment consultancy services and / or fiduciary management services. The investigation has the potential to have a significant and lasting effect of their businesses for many years to come. 

Equally, any organisation who procures investment consultancy services and / or fiduciary management services should be very interested in the investigation. In particular, the CMA has stated that its initial focus will be on pension schemes as major procurers of the kinds of services being investigated. The CMA is also interested in the extent to which other institutional investors (for example, charities, insurance companies, and endowment funds) use investment consultancy services and / or fiduciary management services; it may widen the scope of the investigation to also consider these types of organisations’ experiences in more detail. 

What happens next? 
The CMA has asked for comments on its issues statement by 12 October 2017. The CMA will then begin to gather evidence from relevant parties (both investment consultants and their customers), via site visits, formal information requests and hearings before moving onto publishing various provisional and, subsequently, final decision documents. Overall, the investigation could take as long as 18 months (plus any time required to implement any remedies that are decided upon). 

How can Shepherd and Wedderburn help?
Shepherd and Wedderburn’s award-winning Regulation and Markets team advise major UK and international clients on all aspects of competition law, including market investigations. Recently, we supported one of the ‘Big 6’ energy firms through the CMA’s energy market investigation. We have successfully advised and assisted clients in respect of numerous other CMA and European Commission competition investigations.

If you are interested in discussing the CMA’s investment consultancy investigation further please contact Gordon Downie on the details provided below, or your usual Shepherd and Wedderburn contact, to discuss how we may be able to assist.