On 14 September 2017, alleged “serious concerns” lead the Financial Conduct Authority (“FCA”) to reveal its final decision to exercise its jurisdiction under Part 4, Section 131 of the Enterprise Act 2002 (“the Act”). The FCA subsequently referred investment consultancy and fiduciary management services to the Competition Markets Authority (“CMA”) for a Market Investigation Reference (“MIR”) – the first time that the FCA has made such a reference.

Christopher Woolard, the FCA’s Executive Director of Strategy and Competition commented:

“It is a significant step for us to make this recommendation. We have serious concerns about this market and believe that the CMA is best placed to undertake this work”

What is an MIR?

Section 131 of the Act allows the FCA to make an MIR when there are reasonable grounds for suspecting that any feature (or combination of features) of the financial services market in the UK prevents, restricts or distorts competition in connection with the supply or acquisition of any financial services in the UK (the ‘reference test’). An MIR is a market investigation conducted by the CMA to thoroughly examine the merits of the FCA’s ‘reasonable grounds’ under Section 131 of the Act.

Background to the FCA’s decision

The FCA’s decision to make an MIR for investment consultancy and fiduciary management services comes as no real surprise following the FCA’s interim report on its Asset Management Market Study which it published in November 2016. The November study detailed the FCA’s concerns and revealed its intention to make an MIR. This led to the offer of a package of undertakings in lieu, designed to address the concerns of the FCA, from the three largest investment consultants. The FCA welcomed the proposal, however, could not be confident that it would be a full solution to the adverse effect on competition which had been identified by the FCA. As such, the proposal was rejected and the final decision taken to make an MIR.

The FCA thinks that investment consultancy and fiduciary management services have an adverse effect on competition. The following features were cited by the FCA as being of particular concern:

• a “weak demand side” with pension trustees having limited experience and resources leading them to rely heavily on investment consultants. Trustees have limited ability to assess the quality of investment consultant’s advice or compare services which results in rates of switching investment consultants being low.

• High levels of concentration within the market and relatively stable market shares among investment consultants (the largest three firms together hold between 50-80% market share).

• Barriers to expansion restricting smaller, newer consultants from developing their business: The FCA noted that an investment consultant’s brand and its relationships were the major factor in developing its business not the quality of its advice.

• Vertically integrated business models creating conflicts of interest.

What next?

In response to the MIR referral by the FCA, the CMA sent Information Requests to “the main companies involved” and published its Issues Statement on 21 September 2017 for consultation. Interested parties are invited to submit their responses to the Issues Statement by 12 October 2017.

The statutory deadline for the CMA to conclude its investigation is 13 March 2019.