Consultants who advise on workplace pension schemes are facing more scrutiny than at any time in their history. The FCA’s asset management market study may have had the fidicuary management processes of the big three consultancies, Aon Hewitt, Mercer and Willis Towers Watson as its primary focus in the field of workplace pensions, but another key upshot of that paper was its recommendation to the Treasury to consider extending the regulatory perimeter to “investment consulting and employee benefit consulting asset allocation” – or to put it more simply, the regulation of workplace pension consultants and advisers that are making asset allocation calls.
The ultimate decision will be down to the Competition and Markets Authority, to which the FCA referred the investigation into the sector, but the FCA’s recommendation that workplace advisers be brought within its remit was clear.
Public affairs firm Cicero Group’s account director Simon Fitzpatrick says: “The ball is in the CMA’s court on this issue now, but it has its origins in the FCA Asset Management Market Study which came out last summer. This is a very concentrated sector and it is unsurprising that the FCA ultimately took the decision to make a referral to the CMA. There are very few major players operating in this space and the FCA clearly had concerns about the lack of choice in this market. There are parallels with the audit sector here.
“In terms of where we ultimately end up, there is still a long way to go in this process. The statutory deadline for the CMA’s final report is not until 13 March next year – though we will have a provisional report this summer that will give us some good insights into the likely direction of travel.”
“If the conclusion is eventually reached that full IFA-style regulation of the sector is required, then this may require legislation, but that is not a given – the Retail Distribution Review was implemented through regulatory changes rather than primary legislation. With the amount of Brexit-related legislation still to go through in this Parliament, all indications are that the Government is looking to minimise the need for primary legislation elsewhere where possible. However that is a question that I would expect to be answered much further down the line. In the meantime, both Government and regulators are likely to await the conclusions of the CMA investigation before deciding how to proceed.”
It may be important to understand not just the similarities to but the differences with the IFA market.
The RDR raised the bar significantly for IFAs but financial advice was already subject to full FCA regulation. Pension consultants are often highly qualified and subject to different types of regulation such as from the Institute and Faculty of Actuaries, but not the sort of full conduct regulation demanded by the FCA of IFAs and other firms under its remit.
Then again, conduct regulation is not the same across all sectors. Financial Inclusion Centre director and former FCA non-executive director Mick McAteer says: “If the activity of providing investment consultancy to employers becomes a fully regulated activity, providers in that market would be subject to the conduct of business rules, but it is unclear how the sophisticated client test and the proportionality rules would be applied to that activity. So it could be lighter than advisers to retail clients.”
Experts says it will be interesting to see how any perimeter extension would fit with other initiatives, including moves to raise the standards of lay trustees, to tighten the regulations around pension transfers and to counter scams. The rationale for these initiatives would seem to fall broadly under the requirements of consumer protection; the referral is clearly more about competition although of course genuine competition has consumer benefits too.
Pension Management Institute technical consultant Tim Middleton says: “For a long time, there has been a lot of inconsistency between retail and occupational pensions yet there has also been a lot of pressure to address this. Logically if you are going to put IFAs under such a high degree of scrutiny, it makes sense that you should require at least something broadly comparable for this sector. The big consultancies should be subject to a similar degree of regulation. It is only reasonable.”
Yet Middleton suggests that some of the drive for change comes from the fact that SSASs are the “scammer’s current favourite weapon of choice”, while issues around transfers are also exercising regulators. The broader pension industry therefore needs to be paying attention to the joint strategy TPR and the FCA are working on. He hopes that the industry arrives at what is a holistic and consistent approach.
Aviva head of workplace strategy Dominic Fryer says the FCA’s logic for wanting regulation is based on the vastly different landscapes that exist between individual and group pensions. Fryer says: “Under current regulations, an adviser has to be regulated to provide advice to an individual. There are strict rules around the advice and advisers are potentially liable for any poor outcomes as a result of that advice.
“It is a completely different story for advice to employers. There are currently no rules around who can offer advice, but poor advice regarding who should be the scheme provider, or the structure of the scheme, could lead to a whole workforce being out of pocket.”
Fryer believes the cost of complying will not be low. “The recent Investment Markets Review and the ongoing review by the Competition and Markets Authority point to a future position where advice to employers may be brought under the remit of the FCA. This would be a significant development for advisers and providers with some not insignificant financial implications. Costs could run into millions of pounds depending on the strength of the regulations and the number of people a company needed to train or hire.
“The question is, how soon can this happen? It will need legislation to push it through and with the government focusing on Brexit there are limited opportunities to get this through Parliament.
“But it is necessary. The current situation cannot continue indefinitely. Advice to employers on workplace pensions needs to be held to the same standard as advice to their employees.”
But some firms remain to be convinced of the case for specific regulation of advice to employers.
LEBC director of public policy Kay Ingram says: “The case for regulation of occupational pension consultants has not yet been made. Before legislators rush to regulate this sector they need to establish what the benefits to occupational scheme members will be and whether these outweigh the extra costs on schemes.
“If a case for regulation can be made, and I believe it has not yet, then The Pensions Regulator which regulates trustees of these schemes would appear to be more appropriate to the task than the FCA which regulates retail investments.”
She also warns of a risk that regulation is seen by politicians as something of a solution to the challenges facing defined benefit pensions which, she says, it certainly is not.
Firms already regulated
Most commentators suggest that consultancies already work to high standards, which they say should influence the FCA’s eventual approach, though it also means that FCA regulation is less of a leap.
Aegon pensions director Steven Cameron says: “While advice to employers can fall outside FCA regulation, many firms who are active in this field also carry out other regulated activities so will already be subject to FCA regulation. Any move to extend the regulatory perimeter to include advice to employers should take this into account and we would hope those already authorised in other pensions areas would not need to make any major adjustments to their business. The joint FCA / Pensions Regulator strategy is an ideal opportunity to identify any regulatory ‘gaps’ and then to identify proportionate means of addressing any concerns.”
PTL managing director Richard Butcher believes the sector should cope well. He says the review could give firms a clean bill of health or set out adjustments to “allow them to be seen providing a certified service that is right for the clients”.
“There are clearly concerns around conflicts of interest and how they manifest themselves. Most of them are through the provision of integrated models, consultancy and investment management which is part of the same package. I would be very surprised if something doesn’t emerge from that.
“There may even be something around entertainment, but with other significant stuff about transparency around costs and charges, so we may see some small changes and one or two big changes.”
However while these may strike some as very thorny issues, he suggests it may not have a huge impact.
He says: “In terms of substance, I don’t think it is going to make a huge amount of difference. Most investment consultants give advice to a pretty high standard. Most are regulated through the Institute and Faculty of Actuaries and most operate in an environment where other parts of their businesses are regulated. It may not be a really material change.”
“There may be concerns about intervention and whether a regulator can start to interfere in the operation of your business and dictate what you are required to do but I don’t think the latter is going to happen because most investment consultants work to a very high standard already.”
Retail versus institutional
However other voices from retail investment sector have a different viewpoint. GIB managing director Graham Bentley, who works with fund managers and advisers in the retail sector, says: “The key points for me relate to fiduciary management – that’s where the margin is, particularly recommendations to use ‘in-house’ solutions.
“Yes it will completely upend that sector if the perimeter is extended. Asset allocation skills are not confined to consultants, so a wider and more diverse set of providers would enter the fray. While I am not sure that your typical adviser would get involved other than referring on – certainly so-called wealth managers and discretionary fund managers would be in with a shout of winning this business.
“If it fell under FCA remit, the fiduciary arrangement could fall under suitability/appropriateness-type standards and at the extreme end of what might happen, we could see a ‘better then best execution’ rule to prevent competition with the asset managers they vet. Wider asset management players would of course benefit.
“The other issue is the potential for trustees to be in dispute with the consultant. Where previously those disputes would go to court, or settled quietly, they would, under the FCA, go through a similar process as retail investment advice, possibly with some form of FOS relationship. This might change the dynamic significantly, for example bringing an increased frequency of complaints and PI costs, with implications for the general appetite for doing business in a highly regulated environment.”
Clearly the consultancy world’s attention is taken up with the CMA and its papers for now. It will be next year before we hear more detail on the FCA’s regulation recommendation, and implementation could be some time after that. But firms would do well to consider a number of scenarios for what regulation could mean for them and their competitors.
