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Investment Consultants Face U.K. Regulatory Probe

Regulators are worried that pension plan trustees are overpaying for potentially conflicted advice in an investment consulting industry dominated by three firms.

The U.K.’s investment consulting industry is facing a major investigation by the Competition and Markets Authority due to regulatory concern about the quality of advice being delivered to pension funds and the lack of competition.

The Financial Conduct Authority announced Thursday that for the first time ever it has asked CMA to conduct a full investigation of the market because it has “serious concerns” that institutional investors are not receiving good advice from consultants. The FCA estimated that assets amounting to as much as £1.6 trillion ($2.14 trillion) are affected by the advice of the 12 largest investment consultants.

In the U.K., consultants play a huge role in advising pensions, insurance companies and endowments on investment strategies and fund manager selection. The FCA has worried that conflicts of interest have been built into their business models and that a few firms dominate more than half of the market. While the consulting industry has responded by offering the FCA potential remedies, they weren’t enough to keep the industry from being the target of a larger probe.

“We have serious concerns about this market and believe that the CMA is best placed to undertake this work,” Christopher Woolard, executive director of strategy and competition at the FCA, said in the announcement. “It is important that trustees can be confident they are getting good quality advice and value for money from their investment consultants.”

The FCA outlined several areas of concern in its announcement, saying that while pension trustees were reliant on investment consultants, they had limited ability to assess the quality of their advice or to compare services. The regulator found that three firms — Aon Hewitt Investment Consulting, Mercer and Willis Towers Watson — hold 56 percent to 80 percent of the advisory market and that barriers to market entry made it difficult for smaller consultants to develop their business.

“We don’t know what the CMA are going to recommend, but it could be that the big consultancies change their practices before the results are even announced,” said Ben Gold, head of pension investment for the north of England at consulting firm Xafinity. “Within those businesses they may look at the profitability of the different business lines and it is entirely possible that the firms decide to split the business lines themselves.”

Gold said the regulatory probe could lead to “better outcomes for pension schemes” and more business for mid-tier consultancies like Xafinity. The CMA said Thursday that it will conclude its investigation into whether there are any “adverse effects on competition” in the investment consulting sector by March 2019. The regulator will consider potential remedial action should any be found.

[II Deep Dive: U.K. Pension Plans Prepare to Dump Consultants]

The largest consultants defended their advice on Thursday, saying they work hard to design bespoke, independent, investment ideas for their clients and will cooperate fully with any investigation undertaken by the CMA.

Andrew Kirton, senior partner and global chief investment officer at Mercer, said the firm is “proud” of its work in investment consultancy and fiduciary management sector.

He said Mercer is “entirely independent of any asset manager” and that its “intellectually rigorous” advice is tailored to the requirement of individual clients.

“It is important that our clients are confident that the investment consultancy market operates in their best interests,” he said. “We will engage proactively and constructively with the CMA as they undertake this fresh, independent and evidence-based review.”

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