Investment consultants have been formally referred to the Competition and Markets Authority, in the first ever request to the agency for a potential direct intervention into a financial market.
The Financial Conduct Authority had repeatedly warned that it was not satisfied with the level of powers accrued by the investment consultants, which play a pivotal role in the allocation of around £1.6 trillion in UK wealth.
Chair of industry pressure group the Transparency Taskforce and former board member of the Investment Association Andy Agathangelou described the referral as 'momentous'.
'Every right-minded financial services professional must surely want a competitive, vibrant and conflict-free financial services market and that is what this decision is all about,' he added.
The FCA earlier this summer rejected an undertaking in lieu on market conduct issued by the sector’s ‘big three’ - Aon Hewitt, Mercer and Willis Towers Watson – as it recommended the industry be bought under its regulatory umbrella.
‘It is a significant step for us to make this recommendation,’ said FCA director of strategy and enforcement Christopher Woolard. ‘We have serious concerns about this market and believe that the CMA is best placed to undertake this work.
‘Investment consultancy services play a significant role advising pension fund trustees when they are procuring asset management services. It is important that trustees can be confident they are getting good quality advice and value for money from their investment consultants.’
The FCA had levelled sharp criticism at the consultancy industry in both its interim and final Asset Market Reviews in the last 12 months, warning that the sector exhibited a ‘weak demand side with pension trustees relying heavily on investment consultants but having limited ability to assess the quality of their advice or compare services’.
It had further concerns about ‘relatively high levels of concentration’ and ‘relatively stable market shares’ with the three largest sector business controlling between 50% and 80% of the market.
Many fund managers have also bitterly criticised the gatekeeper powers of the sector, warning that the business was choking off the supply of capital to a long-tail of funds, and was a leading cause of homogenisation in asset management.
Punter Southall Investment Consulting managing director Danny Vassiliades said that the business welcomed the intervention.
'Contrary to what others in our industry may say, this is a good outcome for investment consulting and its customers,' he said.
'Several of the undertakings in lieu that were proposed had merit. However, it cannot be right that the future direction, structure and regulation of our industry is driven by its participants. We look forward to the CMA’s findings in due course.'