Regulation of investment consultants - Thistle Initiatives

What has happened?

In its Regulatory Initiatives Grid published in May 2021, the FCA confirmed that it would be consulting on the recommendation previously issued by the Competition and Markets Authority (the CMA) to bring the activities of investment consultants within the FCA’s remit.

What do you need to do?

In February 2019, the FCA responded to the CMA’s report following its market investigation into the supply and acquisition of investments compliance consulting services and fiduciary management services. The report proposed, among a number of other areas, that the CMA should recommend that the Treasury pass legislation to extend the FCA’s regulatory perimeter to include all the main activities of investment consultants. In its response to the report, the FCA commented that;

We support the recommendation to extend our perimeter to capture the full scope of investment consultancy services. We agree that due to the size of the market for investment consultancy services a small change in the quality of service provided could have a significant impact on savers’ retirement outcomes. We also note the broad support from across industry for an extension of our perimeter to capture investment consultancy services. Bringing investment consultancy services into our perimeter would allow us to consider future market developments which may affect pension savers. It would also allow us to consult on rules to incorporate the CMA’s remedies into our regulation of the sector.

This reflected the FCA’s finding in the Initial Report published in November 2016 in relation to its Asset Management Market Study that;

……we are considering recommending that HM Treasury brings the provision of this advice within the regulatory perimeter. This is a very important part of the asset management value chain which is currently unregulated. Bringing this within our regulatory ambit would not only improve regulatory oversight on this activity, it would also mean we would be in a position to take forward any recommendations put forward by the CMA’s market investigation reference.

Among the numerous concerns identified by the FCA in this Study that drove this finding were;

• • the investment consultant market is relatively concentrated and switching rates are low,
  • on average, consultants are not able to identify managers that offer better returns to investors,
  • consultants do not appear to drive significant price competition between asset managers,
  • consultants do not place a lot of weight on manager fees in their ratings, although in some instances they can help investors in negotiations on price,
  • the advice provided by investment consultants on asset allocation and investment strategy is significantly more influential in terms of outcomes than the advice on manager selection. However, many institutional investors struggle to monitor and assess the performance of the advice they receive,
  • there is no standardised framework to assess the quality of advice or help investors assess whether they are achieving value for money,
  • concerns about conflicts of interest arise in fiduciary management, [also known as implemented consulting], which is increasingly offered by investment consultants and fund managers. These issues are exacerbated because investors cannot assess whether the advice they receive is in their best interests, and
  • performance and fees of fiduciary managers appear to be among the most opaque parts of the asset management value chain. A lack of publicly available, comparable performance information on fiduciary managers also makes it hard for investors to assess value for money.

How can we help you?

If you’d like to know more about our investments compliance consulting services and how we can help you with your investment consultancy arrangements, or any other regulatory compliance issues, our expert team is here to help. Contact us today on 0207 436 0630 – or email info@thistleinitiatives.co.uk.