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U.K. Watchdog IDs Trouble Spots in Investment Consultant Industry

The business models of some of the most influential investment consultants are under review, with the regulator in charge of the inquiry identifying three major areas of concern.

The U.K.’s market competition regulator on Thursday spelled out three areas of concern it is reviewing in its investigation into the country’s £1.6 trillion ($2.2 trillion) investment consulting industry.

The Competition and Markets Authority said it would consider whether pension funds find it hard to compare or switch consultants, whether consultants have conflicts of interest that prevent investors getting the best deal, and whether new competitors find it difficult to break into the market, thereby making it less competitive and creating worse outcomes for customers.

The announcement comes a week after the U.K.’s financial regulator, the Financial Conduct Authority, passed the sector to the CMA for scrutiny amid concerns it had about whether institutional investors were receiving good service.

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In a media statement announcing the terms of the investigation, John Wotton, chair of the CMA-appointed group investigating the matter, said he felt it is extremely important that the investment consultancy sector works effectively for its clients. The U.K.’s investment consultant sector is dominated by three big players: Aon Hewitt Investment Consulting, Mercer, and Willis Towers Watson, which collectively hold between 56 percent and 80 percent of the advisory market, according to the FCA.

Wotton said he wanted to ensure the investigation covered all areas that could affect whether investors received a good deal.

“That is why we are urging people to get in touch if they have any evidence to share or views about whether these are the correct areas for us to be investigating,” he said in the statement.

The CMA has invited investors and interested parties advised to respond by October 12. The regulator has also hired a private market research firm, IFF Research, to survey occupational pension schemes in the U.K. for their views.

Some consultants think the inquiry will lead to many large consultants changing their business models, particularly if they offer advice (consulting) and the service to implement that advice (fiduciary management).

Ben Gold, head of pension investment for the North of England at Xafinity, said a structural separation of some consultant businesses make take place before the CMA’s inquiry concludes.

“You could start seeing structural movements in the consulting firms, where a firm that has traditional and fiduciary services split the business,” he says.

Gold adds that other possibilities may include a consolidation of firms in the market or the establishment of trade groups representing those businesses that are active in investment consulting or fiduciary management, to ensure their lobbying voice is heard.

“I suspect we will see more subtle changes happening over the course of the year,” he adds.

The CMA said the investigation will be led by legal expert John Wotton, who will chair the inquiry. Wotton was previously the president of the Law Society of England and Wales and a solicitor with global law firm Allen & Overy until his retirement in 2012. He will be supported by lawyer Lesley Ainsworth, a former partner at Hogan Lovells; Bob Spedding, formerly head of advisory risk management for KPMG; and freelance economic adviser Tim Tutton.

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