UK Financial Conduct Authority Makes First Market Investigation Reference

On September 14, 2017, the Financial Conduct Authority (FCA) confirmed that it was making a Market Investigation Reference (MIR) to the Competition and Markets Authority (CMA) in relation to services for investment consultancy and fiduciary management. This is the first time the FCA, which has significant numbers of competition lawyers within its ranks, has exercised its power to make a reference to the CMA.

The MIR is part of a proposed package of remedies, and represents the culmination of a twoyear FCA study into the UK asset management industry, which concluded that the market was affected by a weak demand side, concentration among providers, high barriers to entry, and vertically integrated business models.

The scope of the MIR covers the supply and acquisition of investment consultancy services and fiduciary management services to and by institutional investors and employers in the UK.

Background

The UK's asset management industry manages around £6.9 trillion of assets. Of this, £3 trillion is managed for UK pension funds and other institutional investors.

In November 2015, the FCA launched its market study into the UK asset management industry. An interim report was published in November 2016, in which the FCA concluded that there was weak price competition in the asset management industry. The report also concluded that actively managed funds did not outperform benchmarks after costs and that some actively managed funds offered similar market exposure to passive funds, but with significantly higher costs.

The report found that the investment consultancy market was relatively concentrated with the top three firms accounting for roughly 60 percent of the market, and the advice of the 12 largest advisers potentially affecting £1.6 trillion of assets.

The market was also found to be characterised by low levels of switching between providers. Institutional investors surveyed revealed that 91 percent of them had not switched consultant in the preceding five years.

The FCA also raised concerns over the expansion of investment consultants into fiduciary management, and the potential for resulting conflicts of interest.

As a result of the findings in its interim report, the FCA proposed remedies, including increased transparency surrounding costs and charges, as well as announcing a provisional decision to make a MIR.

In response to the interim report, the three largest investment consultant firms offered a series of Undertakings in Lieu...