The Financial Conduct Authority proposed sweeping changes to the asset management sector in order to improve transparency and value for money for customers, including around fee disclosures and fund governance.

In a toughly worded interim update in November, the FCA had raised the prospect of referring the consultants, which advise on 3 trillion pounds of investments for pension schemes and others, to the Competitions and Markets Authority, citing concerns around conflicts of interest and opaque fees.

That prompted the three leading consultants, Aon (>> Aon PLC), Mercer (>> Marsh & McLennan Companies, Inc.) and Willis Towers Watson (>> Willis Towers Watson PLC), which together make up 60 percent of the market, to band together and issue a series of private pledges to the regulator to prevent a review.

In its Wednesday statement, the FCA said it was inclined to reject those so-called 'undertakings in lieu' because the proposals did not come from the whole market, and instead said it would consult further and make a decision in September.

It also said it would recommend that the UK finance ministry consider allowing the watchdog to regulate the sector.

Mary Starks, the FCA's director of competition, said the "thoughtful and serious" offer of undertakings made by "big three" investment consultants cover about 60 percent of the market.

"Our thinking is if we were to accept that, it would only give us partial market coverage," Starks told reporters. "We don't think the offer does away with the need for in-depth investigation of that market."

The head of the FCA, Andrew Bailey, said the move by some consultants into fiduciary management - running money like an asset manager - alongside their traditional advisory business, created potential conflicts of interest between the two.

    "It's that sort of area we would recommend looking at," Bailey said.

Tamasin Little, partner at law firm Reed Smith, said the attempt by the major investment consultants to head off a competition investigation by offering voluntary undertakings "appears to have failed".

The consultants, which have not made their proposals public before, repeated in statements on Wednesday their belief the proposals should answer any regulatory concerns.

"The combination of a mandatory tendering regime, performance and fee standards, and conflicts of interest protocols act as a powerful spur to competition," Mercer said.

Willis Towers Watson, meanwhile, said the pledges provided "a solid foundation on which to build any future work on the investment consulting industry", while Aon said it was confident the proposals reflected best practice.

The three firms also said they supported the plan to bring them under the regulatory remit of the FCA.

Smaller consultants, however, remained eager for a shake-up of the sector.

"Competition within the investment consultancy market is worth looking at, and (we) would encourage the FCA to make a recommendation to the CMA," Danny Vassiliades, head of investment consulting at Punter Southall, said in an emailed statement.

"There is a clear requirement for remedies to increase competition."

(Editing by Pritha Sarkar)

By Carolyn Cohn, Huw Jones and Simon Jessop