UK pension consultants prepare for era of no-nonsense
They kept a low profile as banks and other pillars of the financial services industry were upbraided by regulators.
Now the consultants who influence how trillions of pounds of pensions are invested are finally under pressure. Any hopes the industry had of avoiding a full-scale antitrust probe were dashed last week by the City watchdog.
Dominated by three big players – Mercer, Aon Hewitt and Willis Towers Watson – consultants had avoided the gaze of the Financial Conduct Authority (FCA), despite their crucial role in how pension funds invest. The twelve largest consultants advise on £1.6trn of assets, rate asset managers and advise investors on how to allocate their money.
Now the City regulator is cracking down, after finding a concentrated industry with opaque charges and widespread conflicts of interest, most notably among consultants that invest money on behalf of a trustee, a process known as fiduciary management.
After years of profitable obscurity, investment consultants – which – have a rockier road ahead.
The question now isn’t whether regulation is coming but rather how much change ends up taking place. It is seen as unlikely that the FCA would point to problems then not act.
“Once the horns of the compliance people get stuck into you, they’re never going to let go – they just get deeper and deeper,” warned Keith Hiscock, the chief executive of capital markets consultancy Hardman & Co.
“They may have to restructure their businesses, they may not be allowed to do fiduciary management. Big lunches [will] get completely blown.”
The FCA is concerned the sector is advising trustees in a market in which they are themselves players. The total value of assets managed by investment consultants has tripled in the last five years and if the industry is referred for an investigation, the Competition and Markets Authority (CMA) could decide impose formal splits.
“The real question is what consultant firms will look like [after this], and a lot will depend on whether they go to the CMA,” said Patrick Disney, the Europe managing director of SEI, a fiduciary manager which dropped its investment consulting arm in the ‘90s.
“If it does, they could easily point out a total separation of their fiduciary management and advisory arms. I think that is likely if it goes to the CMA.”
To avoid these sorts of worries, the trio that make up 60pc of this market dangled a package of remedies in front of the FCA designed to address concerns. The watchdog wasn’t satisfied, however.
It said last week that it was likely to reject the proposals, partly because it didn’t come from the whole market and partly because it was unable to confirm its understanding of the competition issues in the sector.
“I think [it] is polite or formal speak for we still don’t know enough about the industry,” Mercer’s chief investment officer Andrew Kirton said. “[We were] disappointed by that because they’ve had 18 months to get to know us. We would have liked the FCA to have accepted our undertakings.”
While clearly irked that the remedies are likely to be rejected, Kirton does a good job of hiding any wider concern over a competition probe or regulation aimed at the sector.
A Mercer veteran, he points out that small or new players must be licking their lips “and thinking ‘pwoar great’” at the idea of increased competition and a chance to pitch for Mercer’s clients.
“That should create a vibrant environment,” he says, arguing that “if we’re any good at what we do, and we are, then we should be winners not losers from this.”
The small players seem eager for change. Richard Dowell, the co-head of clients at pension fund manager Cardano, said there is a “deep need for greater transparency” in the investment consultancy sector, which he emphasises is on the cusp of a new era, while Mark McNulty, the head of investment solutions at JLT Employee Benefits, called on the FCA to drive regulation through as soon as possible.
The three dominant players in this space are enormous. Aon has a market capitalisation of $35bn, Willis Towers Watson of $20bn and Mercer $772m.
Yet Cass Business School’s professor of asset management Andrew Clare said he doesn’t currently see a barrier to entry for small start-ups.
With that in mind, he warns against too much red-tape.
“Would I feel safer knowing they’re being overseen by a regulator? Not necessarily,” he said, adding that people are dealing with members of the actuarial profession here and not, as he phrases it, cowboys.
“If regulation is too onerous it might prevent start up of new investment consultants, and we certainly don’t need that.”
Lack of competition was not the FCA’s only bugbear in the sector. Investment consultants’ love of a jolly is also under scrutiny.
The regulator found a link between investments consultants receiving gifts or hospitality and the likelihood of providing a high rating to an asset manager. It admitted that the data set wasn’t reliable enough to say for sure whether or not ratings were influenced by this, however. Even so, it is an area stricter rules may fall in future.
“Do I think entertainment has ever unreasonably influenced providers in the industry? No, I don’t think it has,” Kirton insisted, explaining that there is a formal process when it comes to working out if a product is going to perform well or not.
“Is the world becoming somewhat joyless? Well, quite possibly. One moves with the times. I think the vast majority of people who work in consulting went into it because they like clients – that’s partly [about] applying your brain matter and partly communication. People don’t work for Mercer because they think they might get a ticket to the rugby.”
Read the original story on Telegraph website.