New rules coming into force from October will require schemes and DC master trusts whose employer or funder is connected to a fiduciary manager or consultancy to set investment consultant objectives. The government has also sought to define fiduciary management and advice. How much has changed compared with the CMA order?

 

The government has responded to a consultation on regulations to replace the current order on fiduciary management and investment consulting by the Competition and Markets Authority. The CMA order was made after a referral by the Financial Conduct Authority, which had found that many schemes did not tender for fiduciary services, choosing the firm that had been their investment consultant. 

The order was due to be replaced by regulations that were to be closely aligned with it, which is happening with a delay “as a result of reprioritisation brought on by the onset of the COVID-19 pandemic”, the Department for Work and Pensions said. 

 

Industry commentators had previously suggested the delay could be to do with the feedback the DWP had received from industry on some of its proposals, especially where they differed from the CMA order.

One such difference is about the type of schemes that are exempt from the rules. Under the CMA order, schemes where the principal or controlling employer of a scheme is itself a provider of fiduciary management and/or investment consulting services to the schemes were exempt, as were defined contribution master trusts for which an IC-FM firm is the scheme strategist or scheme funder.

 

The DWP said it agreed that “it would be impractical in these circumstances to expect the scheme trustees to carry out a competitive tender for FM services when they would have a clear and legitimate preference to use the services of the sponsoring employer”. While such schemes do not have to tender for fiduciary managers, the DWP is nonetheless, tightening requirements compared with the CMA order. It said it is “reasonable for the trustee to set their IC objectives and monitor performance against them, regardless of whether the IC is connected with the sponsoring employer of the scheme”, as members could still suffer detriment otherwise. 

Schemes whose trustees own a fiduciary manager or investment consultancy remain exempt of both requirements; this has been extended somewhat compared with the CMA order after the Association of Pension Lawyers had raised concerns about the definition of “trustee-owned company” in the consultation.

It highlighted that to be a trustee-owned company, the FM-IC would have to be wholly owned by trustees of one particular pension scheme. The DWP has now said it does not want to exclude in-house firms by definition, “as we believe this in itself could be subject to an avoidance risk”, instead changing the definition of trustee-owned company so that it includes companies which are wholly owned by the trustees of several different schemes, or by trustees and companies which are themselves trustee-owned. 

 

 

More fundamentally, the Investment Association had raised concerns over the definition of investment advice and fiduciary management, saying these were too wide – and criticising the DWP for not replicating the CMA’s wording that advice includes a recommendation or guidance.  

 

“We note this language has been removed from the Draft Regulations, the effect of which is to make the definition of advice significantly broader than the definition in the CMA Order. This not only creates inconsistencies in the interpretation of advice and FM and IC services, but most importantly has the effect of materially widening the scope of FM and IC services, thereby resulting in overly complex, burdensome and unwarranted obligations falling on both firms and trustees,” the IA said. 

 

Mercer also stated that “a definition of investment consultancy services more in line with the CMA’s Order is required to provide more certainty for the trustees and providers”. 

 

The government has now clarified that it does not matter whether advice is given in a recommendation, guidance or otherwise, but has stuck with bringing investment strategy advice into its definition of investment consulting services.

 

The definition of advice, in particular how it differs from guidance, “is possibly the most vexed question bedevilling the whole of the financial services industry today”, said Ian Neale, the recently retired managing director of consultancy Aries Insight. He noted that various government departments were grappling with it, whether it was investment advice or tax advice.

 

Elsewhere, 'fiduciary management' has now been extended to include scenarios where an asset manager, after having been appointed as such, begins to give investment advice, something which according to consultancy LCP is “fairly common”. The DWP has therefore removed a time limit of 12 months from the regulations, meaning an asset manager giving advice will be considered a fiduciary regardless of how long ago they were hired. 

 

 

While these changes affect providers and some types of schemes, for most, the regulations will not fundamentally alter how they deal with fiduciary management and investment consulting, with the exception of schemes that have an asset-backed contribution structure; the government has agreed to exclude these assets from the 20% test, alongside buy-in policies. 

 

“I don’t think a lot has changed. I think there’s been some very useful clarification,” said Andre Kerr, who heads up fiduciary oversight at consulting firm XPS Pensions Group. “Where it doesn’t go, where it’s limited in its nature, is talking about the need for trustees to get independent advice where fiduciary management is in place,” he added.  

 

Kerr noted that the Pensions Regulator offers guidance on getting a third party to evaluate fiduciary managers. Though that guidance “could be stronger”, he said the key was that trustees interpret it in terms of when to get advice.  

 

“In a lot of cases trustees feel they can do it themselves. Having sat on both sides... I'd strongly argue that in a minority of cases trustees could properly challenge what a fiduciary manager is doing in the portfolio,” he said. 

 

For DC master trusts whose funder offers fiduciary management, setting consultant objectives does not improve competition, but Kerr believes setting the objective “gives a yardstick to measure performance against”, and helps to know what the scheme is working towards. 

 

While the regulations attempt some definition of advice and fiduciary management, he said it was difficult to give a single definition: “You have to look at the spirit of the order and what it’s trying to capture.” 

 

Andre Kerr

Ian Neale

Donny Hay