The UK's Financial Conduct Authority has decided to make a recommendation or 'market investigation reference' to the Competition and Markets Authority in relation to investment consultancy services and fiduciary management services.

In the reference it is making it asks the CMA to "address the concerns" it raises about the parlous state of competition in the area. The three largest investment consultants in the UK – Aon Hewitt, Mercer and Willis Towers Watson – recently and unsuccessfully offered it some undertakings in lieu of such a reference, which suggests that they were (and are) worried about the eventual outcome.

In November last year the regulator published a report on asset management in which it uncovered:

• a weak 'demand side' (see below);
• its inability to assess the quality of advice provided by consultants;
• persistent levels of concentration and relatively stable market shares among investment consultants;
• high barriers to entry and expansion, particularly the inability of smaller or newer consultants to develop their business outside of specialist areas; and
• vertically integrated business models.

A financial advice barrister told Compliance Matters: "This does affect HNWs' pension schemes, although most schemes in this area are occupational. People tend to have exaggerated expectations of competition reviews. It looks as though something's going to come of this, but it could merely be a series of undertakings on the part of the big three consultants and nothing more.

"The FCA could do its own market research and issue a consultation paper and change the rules, but this is really an economist's job. The FCA's general rule is that if it can handle something it'll do it, but it'll go to other bodies like the CMA if it needs a scientific justification for what it's doing. Also, its tools are a lot blunter than the CMA's in this area. It doesn't really have the investigative powers to do it properly. It can't tell companies to divest themselves of subsidiaries. It can say no to a merger by not authorising it, but that won't change the market as a whole. It could do a 'section 166' investigation everywhere, but again that doesn't relate to the market in general but merely to a firm.

"It just doesn't have the expertise to tackle this. Until recently (2013) it had no competition powers (or statutory competition objective) at all. It could do with some economists looking at the problem and fewer rulebook people. The economic work done by old Financial Services Authority (the FCA's predecessor before 2013) was very poor quality indeed. This might be a sign that it isn't absolutely certain that the market is very dysfunctional and it wants to be sure. Also, in a sense, the FCA is not beating up its own people if it gets someone else to investigate them, and that might be diplomatically expedient."

On the subject of a weak demand side, the FCA notes that the trustees of many pension schemes often have limited or 'variable' experience together with limited resources, resulting in higher dependency on investment consultants. It also believes that trustees find it difficult to assess the services of fiduciary managers and the quality of advice that investment consultants provide. Switching rates are low – another source of worry.

The barrister continued: "They're worried mainly about investment consultants being questioned by pension scheme trustees who don't know what they're doing (about how to invest pension scheme assets) and recommending the use of the products or structures or services of those same consultants. They've also noticed very high amounts of concentration and limited switching going on.

"Part of what they're referring to is not regulated by them. What rules, after all, have these firms broken? There's no rule that says you can't have a conflict of interest, although there is a rule that says you have to manage it properly. The firms might therefore have broken a bit of SYSC 10, the systems-and-controls part of the FCA rulebook, but this might be marginal. The presence of non-regulated business makes it much easier for the FCA to go 'out of house.' Moreover, the CMA has sweeping remedies and the FCA has not.

"If this area were to be regulated by the FCA, it would require the FCA to come up with a rulebook. One suspects that they are really hoping that the CMA will order the consultants to pension scheme trustees not to use their own products. That's the obvious split. Such products might include master trusts in which HNWs hold their assets. This would not be without its own problems, though. The main players in the industry would then say 'that's all very clever but who's providing the product?' It might turn into a game of pass-the-parcel between the three of them."