Is there a sting in the tail of the CMA review?

Pardon the Interruption

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The Competition and Markets Authority has put the ball back into the Financial Conduct Authority’s court on investment consulting and fiduciary management. Could this next chapter in the saga be more turbulent than expected? 
The market investigation into conflicts among consulting firms cross-selling fiduciary management resulted in remedies such as retendering, but many view the outcome as too soft.  
The CMA was concerned that investment consulting firms could be ‘flipping’ clients to the more lucrative management side and also identified a weak demand side. The final report notes: “We have found that IC-FM firms have strategies and financial incentives to sell fiduciary management to their existing advisory clients.” 
The CMA has come up with a number of remedies to address these issues, but the authority did not go as far as splitting consultants and fiduciaries – a possibility which had been speculated about during the investigation. The case has been referred back to the FCA, to implement the CMA order and wait for legislation from the Treasury to extend its perimeter so that it can regulate investment consultants. 
Some now say that the CMA’s findings and referral will give the FCA the power to do what it wanted to do but couldn’t at the time, which is reviewing how advice is delivered. Could the FCA take a tougher approach to breaking up companies? 
Independent trustee Ian Maybury says the possibility that consulting firms might have to separate from their fiduciary arm should be on schemes’ risk register. “[The FCA] will be much more concerned than the CMA and could force firms to split or operate as very distinct entities,” he speculated. 
What would this mean for the investment consulting market in the UK – and should trustees worry about it? Looking at the case, Maybury sees parallels with the Retail Distribution Review of 2012, which reduced the availability of advice and, he said, made it more expensive. The institutional consultant market could be disrupted if firms offering advice and fiduciary management might reduce their offering – preferring the more profitable fiduciary sector over consulting. 

DB funds 'would be forced into change’ 

Others consider it unlikely the FCA will go where the CMA feared to tread. Donny Hay, director at oversight provider IC Select, said the FCA splitting consulting firms is “possible but unlikely”. The CMA order addresses the competition issues – “and breaking up the big three will not serve the hundreds of DB pension funds that use them,” he said, as “they’ll be forced into change at a difficult time". 
Splitting firms could lead to improved governance, but this was not the focus of the review the CMA had been asked to carry out, and the competition issues which it was concerned with have been addressed with the remedies, says Hay – even if these don't go far enough for many. 
The FCA and CMA reviews have put pressure on fiduciary managers and consultants, and pension funds should seize the opportunity to strengthen their position. Devan Nathwani, an investment strategist at Secor Asset Management, said providers and consumers should use the CMA review to push for greater independence between investment consulting and fiduciary management businesses to create a level playing field.  
He does not see the FCA splitting fiduciaries from consulting firms, however. “We think it is unlikely the FCA will separate investment consulting and fiduciary management businesses, but it’s difficult to predict with certainty what course of action the FCA will take.” 

Do you think it possible that the FCA will be less tolerant of conflicts than the CMA? 

Ian Maybury
Devan Nathwani
Donny Hay
Barry Mack
Simon Daniel
Andy Scott

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