With echoes of St Augustine of Hippo, current government and regulatory thinking on giving the FCA full oversight of pension and investment consultants, appears to be a case of ‘let them be regulated, just not yet’.
We can assume this is a reasonable summation of government policy given the remarks of Economic Secretary to the Treasury Andrew Griffith to a joint session of two Parliamentary committees looking at the LDI crisis, back in March this year.
Griffith confirmed that the FCA perimeter will be moved to encompass consultants but would not be drawn on when. Alongside this, a trawl though FCA statements indicates that the conduct regulator is also in support of the move.
Although of huge import for corporate advisers, the remarks may well have become lost amid the sheer weight of planned legislative and regulatory changes across pensions.
Most attention has focused on LDI. However the trade body representing the bulk of pension providers also supports the move, albeit with a non-LDI related rationale.
The Association of British Insurers called for consultants’ advice to employers on pensions to be regulated in the report ‘Investing in our Future: delivering for savers and the economy’, published in July this year.
The main thrust of the document was a call for a ‘saver first’ strategy in terms of pensions policy. Read with the benefit of hindsight, it positioned the ABI to engage constructively with what would soon be described as the Mansion House reforms, announced by Chancellor Jeremy Hunt just a couple of days later.
Amid the promise of a huge reorganisation of the pension landscape, the ABI recommendation garnered little attention. On page 21 of the report under a list of recommendations for the “shorter term”, it suggested the following:
“As already recommended by the CMA, FCA and the Work and Pensions Committee of the House of Commons, employee benefit consultants should be regulated for the advice they give to employers on pensions. Not only would this avoid conflicts of interest; it would also set standards for their authorisation, qualifications and advice including advising on investing in productive assets. This would also have the benefit of demonstrating Value for Money of their investment advice under the Consumer Duty.”
As with any smart piece of lobbying, the ABI set this recommendation in terms of what the Chancellor and Treasury wants, hence the reference to ‘productive assets’ while also aligning with the FCA’s current flagship regulation, the Consumer Duty. It also seemed to countenance what might be called ‘full fat’ regulation for consultants, perhaps similar to the regime governing financial advisers.
With the ABI name-checking regulators and parliamentary committees, Corporate Adviser set out to find out where exactly this support was voiced, historically. It is all on record.
In its Investment Consultants Market Investigation final report published in 2018, the Competition and Markets Authority made the following recommendation: “HM Treasury should pass the necessary legislation to extend the FCA’s regulatory perimeter to include all of the main activities of investment consultants.”
In a response published late in 2018, the FCA said: “To support its remedy package, the CMA has made several recommendations. This includes a recommendation to HM Treasury to broaden the FCA’s regulatory scope to include the activities of investment consultants to ensure greater oversight of this sector in the future.”
It then quoted Christopher Woolard, executive director of strategy and competition at the FCA at the time, saying: “We welcome the CMA’s in-depth analysis of both investment consultancy and fiduciary management services and support the package of remedies proposed. It is essential that competition works well as these services have a significant impact on the retirement outcomes of millions of pension savers. We will continue to work closely with the CMA, HM Treasury and The Pensions Regulator to implement the CMA’s remedy package and take forward the recommendations in its report.”
However, although the Department for Work and Pensions pressed ahead with other key recommendations, the FCA perimeter was not extended.
Covid delays
A more recent notice from the FCA may shed more light on the subject suggesting that the pandemic halted work on full regulation. In its perimeter report, published in July 2022, the FCA said: “Investment consultants provide unregulated services that can significantly influence the investment strategies of asset owners and asset managers. For example, investment consultants advise pension fund trustees on issues such as
strategic asset allocation and asset manager selection.
“We referred these sectors to the CMA for a detailed investigation. The CMA recommended that investment consultancy services should be brought within our supervisory remit.
“Before the pandemic, the Treasury had planned to consult to bring these services into our perimeter. The Treasury had to put this work on hold in light of other key priorities such as its response to coronavirus. While we note the decision on when to restart this is a decision for the Treasury, we continue to support these services being brought within our perimeter.”
More recently, the issue has risen up the agenda as a result of the leveraged Liability Driven Investment (LDI) turmoil for pensions and bond markets in autumn 2022.
On 7 February 2023, Lord Hollick, chair of the House of Lords’ Industry and Regulators Committee wrote to both Andrew Griffith MP, Economic Secretary to the Treasury and to pensions minister Laura Trott MP outlining a number of recommendations for improving regulation around LDI, stating: “The government should ensure that investment consultants are brought within the regulatory perimeter as a matter of urgency”.
In June this year, the Work and Pensions select committee echoed this recommendation forcefully, in a report on LDI saying: “The ability of pension scheme trustees to ensure they get good advice was cited as an area of weakness. We heard, including from the FCA, that in some cases investment consultants were giving standardised advice, rather than thinking through what is best for the pension fund. We recommend that the Government bring forward plans for investment consultants to be brought within the FCA’s regulatory perimeter.”
However, one ministerial response given in a joint evidence session involving both Parliamentary committees, mentioned above, may have been overlooked. Economic secretary Andrew Griffith confirmed that regulation was the direction of travel. Indeed, the answers shed significant light on the government position.
In a Parliamentary evidence session on March 22 of this year, the minister was asked the following question by Lord Reay: “Although investment consultants are regulated for certain activities,
they are not regulated for pension fund investment strategies, in which LDI obviously paid a key role. Given that, do you accept that investment consultants should be brought within the FCAs regulatory perimeter?”
Griffith responded: “That is the direction of travel. That is our policy. Bringing them within the regulatory perimeter is about things like the senior management conduct regime, about responsibility.”
The minister continued: “As we go through this exercise, I would be interested to hear whether it was particular deficiencies in the investment advisers. That is not what I have heard so far. I have heard about issues of governance, transparency, reporting, the speed of response in a situation that was somewhat exceptional. No one has actually brought forward examples of investment advisers, who are all members of The Institute of Actuaries and regulated at the professional level, not giving diligent and professional advice.
“So I am open-minded to that, but to answer your question very clearly, we are committed to bringing investment advisers within the regulatory perimeter.”
The committee chair Sir Stephen Timms, a former pensions minister in the last Labour government, then asked: “When do you envisage that happening?”
Griffith said: “I do not want to give the committee a specific timeframe. You will be aware that there is a lot of work for the FCA at the moment. I will take that back and look at it. We want to be evidence-led, and I would urge anybody who has evidence of a deficiency in investment advice as part of this to bring that to me and we will consider it.”
Clearly these remarks are illuminating but also potentially open to interpretation in terms of the nature of regulation and where it sits on a list of priorities. Corporate Adviser, at time of writing, had asked both the Treasury and the FCA if there were any updates on their positions, but did not receive any further information.
Those advising the pension industry also agree that regulation looks imminent. Helen Ball, a partner at Sackers, the specialist pension law firm, says: “We’ve had a couple of decades where well-meaning folks have focused on single issue questions, such as lowering charges or increasing member choice. But despite good intentions, there are still some serious flaws in the UK pensions system. It can feel like we solve one problem only for three new ones to spring up in its place.
“We need a more holistic approach to solving the pension savings challenge. It’s no surprise that, following the Mansion House reforms outlined in July, the loose threads left over from the CMA’s December 2018 report on the investment consultancy market have returned to the spotlight.
“After all, if the Government wants pension schemes to invest in a certain way then it needs to make sure that their investment advice is handled appropriately.”
Taking a wider view
But the Society of Pension Professionals (SPP) says that the discussion on the regulation of advisers provided by consultants has been discussed in “rather narrow terms”.
Natalie Winterfrost, chair of the SPP Investment Committee says: “If further regulation is to be considered, the wider advice process and elements of advice provided to trustees and employers should be considered, too.”
She adds: “Consultants’ advice to pension funds on an investment, as defined by the FCA, is already a regulated activity and investment consulting businesses are regulated.
“Advice on certain investment activities, such as setting asset allocation or selection of a segregated fund manager falls outside the strict definition of advising on an investment and therefore is not regulated. We would be supportive of regulated activities being widened such that all advice on investments delivered by an investment consultant is subject to regulation.
“However, we would note that our member firms already apply the same care and diligence to advice on investment strategy, whether it is regulated or not. Under current pension law, the scheme actuary is required to give their view on the suitability of a pension scheme’s investment strategy and it is our view that this requirement should not lead to scheme actuaries being required to seek FCA approval.”
The Association of Consulting Actuaries (ACA) also acknowledged a grey area when it came to regulation of this advice.
The ACA Investment Committee chair Vanessa Hodge, says: “It is correct that not all investment advice is regulated advice – strategic asset allocation and advice on segregated funds fall outside, for example. Most investment consultancies have their own professional and compliance requirements that extend beyond the FCA’s definition of regulated advice, therefore an extension to the FCA’s remit is likely to already be covered by these firms.
“There are some firms which do not have that extra layer of compliance where an extension of regulated advice will be more impactful but should provide additional benefit to their clients. Members of the actuarial profession have additional professional standards to uphold. However, most investment consultants are not actuaries.”
Looking at the ministerial and regulatory comments – alongside views from those trade bodies that represent different parts of the industry it is arguably a case of ‘when’ not ‘if’ some form of regulation is coming. For corporate advisers working in this area it is perhaps time to starting thinking about how they need to address this issue, and how such regulation might be done most effectively.