Aon Hewitt, Mercer and Willis Towers Watson have submitted a joint response to the FCA’s Asset Management Market Study Interim Report, proposing a number of measures to improve competition and transparency in the investment consultancy and fiduciary management sectors – but are refusing to say what their proposals are.
The three consultancies’ joint response contains a number of ‘undertakings in lieu’ in a bid to fend of the threat of a referral to the Competition and Markets Authority (CMA) for a market investigation.
When considering whether to make a market investigation recommendation (MIR) the FCA has to consider whether Undertakings in Lieu of making an MIR would address its concerns.
The market study – published in November – floated the idea of a CMA review of services, transparency of performance and fees, and conflicts of interest in the investment consultancy and fiduciary management sectors. The group has submitted the series of UILs following an indication from the regulator that a solution could be agreed without a CMA referral.
The three consultancies say their lawyers have addressed any concerns that their joint response and series of proposals breach competition laws. The content of the UILs will not be made public.
It is understood that other EBCs were not asked to take part in the joint response as Aon, Mercer and Willis Towers Watson are the three companies identified as having the biggest market share in the investment consultancy and fiduciary management industry, together responsible for about 60 per cent of the market.
The FCA has the power under section 154 of the EA02 to accept UILs instead of making an MIR. But the rules say UILs should only be accepted if the FCA is of the view that they offer as ‘comprehensive solution as is reasonable and practicable’. Guidance goes on to say UILs that satisfy this are ‘unlikely to be common’and ‘there may also be significant practical difficulties associated with negotiating UIL with several parties, where the adverse effects have not been comprehensively analysed’.
However, the FCA’s provisional decision published in November said: “As part of the consultation process, we would be open to considering UIL if we could be confident that they would provide a comprehensive solution that is reasonable and practicable and consistent with our statutory obligations. In doing so, we indicate our willingness to hear in principle, from the investment consultants, what any UIL would cover.”
Aon Hewitt argues that fiduciary managers lower cost because of their ability to reduce transaction costs through pooling. The consultancy has also argued that the FCA market study’s contention that trustees are in many cases insufficiently informed to properly scrutinise consultants is inaccurate.
Aon Hewitt CEO EMEA Andy Cox says: “This package reflects both the concerns raised by the FCA and our own views on how the industry can progress effectively. We operate in a highly competitive and innovative marketplace, and are in complete support of measures to enable trustees to monitor and better evaluate their investment consultants. The package represents readily implementable changes in place of a protracted market investigation.”
Willis Towers Watson head of investment, EMEA Ed Francis says: “The specific measures that we have submitted to the FCA for consideration will, if accepted, help all institutional investors ensure they have the right provider, the right service model, and the right information to judge the quality of our input. We believe their adoption by all firms operating as investment advisers or fiduciary managers will promote the continuation of healthy competition and strong outcomes for our clients.”
Mercer UK CEO Fiona Dunsire says: “Mercer fully supports the FCA’s aim to ensure an effective asset management sector for clients, and – most of all – individuals who participate in pension plans.
“Mercer supports actions that contribute to our clients and their plan participants being able to take effective decisions, including over the choice and assessment of service suppliers. Good investment outcomes are too important not to do everything we can to assure that the entire industry conforms to a common set of high standards.”
Aon Hewitt head of UK investment consulting Tim Giles says: “For our own part, fiduciary management has had a dynamic effect in the marketplace, providing schemes of all sizes with access to approaches previously only available to those with more resources, and driven down asset management fees. We have always believed in offering pension schemes a genuine choice of approach in the way we work with them to provide better outcomes for their members.
“The FCA report asks whether greater asset pooling and integration can help pension schemes. It can and the opportunity for it to do so already exists, but innovative approaches are unjustly criticised by many asset managers because of the disruptive threat they pose. Two fundamental aspects of our business demonstrate this – we invest no more and no less assets with top quality third-party managers whether we work with clients on a fiduciary basis or on an advisory basis, and the third party managers get paid substantially less on a fiduciary basis, due to the impact of asset pooling. As a result, many asset managers see our fiduciary services as a threat to their profit margins.
“The remedies that the FCA has suggested for asset managers will help to address many of the key industry issues. There are a number of long-term market issues that this study has addressed and they are in line with concerns, which we have shared for some years.
“We firmly believe that the fiduciary duty of asset managers should be strengthened and should be clearly linked to delivery of returns relative to clear and comparable benchmarks. Clear accountability for fund oversight boards to deliver safekeeping of assets, transparent and consistent reporting of all fees and justification of all costs is key.”
Aon Hewitt senior partner John Belgrove says: “We noted a number of implicit and more direct criticisms of trustees. We think this broad brush characterisation is misplaced and the truth conceals much more complexity, capability and variation among trustee boards.
“Our partnership with Leeds University Business School is generating research which includes a comprehensive look into trustee decision taking and the role of behavioural bias. It is already bringing clarity and evidence to replace the assertions, rhetoric and misperception which cloud views of these key participants in UK pensions.”