The Financial Conduct Authority said on Thursday it has referred its concerns to the Competition and Markets Authority for a full investigation, the first time it has referred a case to the CMA as part of a broader effort to improve value for money and transparency in the asset management industry.
Investment consultants advise pension schemes, charities, endowment funds and insurers on their investment strategy and choice of investment managers and funds.
Aon (>> Aon PLC), Mercer and Willis Towers Watson (>> Willis Towers Watson PLC) dominate the sector, with a combined market share of 50-80 percent, the FCA said.
"We have serious concerns about this market and believe that the CMA is best placed to undertake this work," Christopher Woolard, the FCA's executive director of strategy and competition, said in a statement
The CMA said it was launching the investigation following the FCA's referral, and would complete the probe by March 2019.
Britain's pensions trade body welcomed the investigation, saying some of its members had "expressed concerns about the potential misalignment of incentives in the sector".
Aon, Mercer and Willis Towers Watson said they would cooperate with the CMA investigation.
"We hope that the process will help bring clarity and consistency to an industry which has to manage potential conflicts of interest," Willis said in a statement.
Pension trustees were relying heavily on investment consultants, but had limited ability to assess the quality of their advice or compare services, the FCA said.
The regulator said it was also concerned about barriers to market entry, preventing smaller, newer consultants from winning business and that "vertically integrated" business models were creating conflicts of interest.
As well as helping clients pick which asset classes and funds to invest in, many consultants now also offer to invest the money themselves.
This move into so-called ‘fiduciary management’ can mean consultants are in direct competition with other managers they are hired to independently assess.
The FCA said in November 2016 it was minded to refer the sector to the competition watchdog, and in June this year added that it was expected to reject a package of undertakings proposed by the big three consultants in a bid to head off a full competition probe.
Danny Vassiliades, managing director of smaller rival Punter Southall Investment Consulting, said the FCA's referral was good for the industry.
"Several of the undertakings ... 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," Vassiliades said.
The FCA was also critical of a culture of the consultants accepting gifts and invitations to sporting and cultural events from asset management companies and its potential impact on the consultants' closely-watched ratings of funds.
"For some investment consultants in our sample we have
found a significant positive association between receiving gifts and/or hospitality and the likelihood of providing a high rating," the FCA said, adding that it considered this "reasonable grounds for suspecting there is a possible conflict of interest".
"It is important that trustees can be confident they are getting good quality advice and value for money from their investment consultants," Woolard said.
($1 = 0.7566 pounds)
(Editing by Greg Mahlich)
By Huw Jones and Carolyn Cohn