The Financial Conduct Authority has asked the Competition and Markets Authority to investigate the consultant and fiduciary management industry over conflict-of-interest concerns.
The U.K. financial watchdog said in a statement Thursday it had made its first market investigation reference to the CMA. It has the power to make the reference "when it has reasonable grounds to suspect that any features of a financial services market prevent, restrict or distort competition."
The FCA said it had identified "a weak demand side with pension trustees relying heavily on investment consultants but having limited ability to assess the quality of their advice or compare services with resulting low switching rates."
It said the three largest firms hold 50% to 80% market share and that "vertically integrated business models" are creating conflicts of interest.
The FCA said in its asset management market study it was considering a referral for investment consultants to the CMA. In response, the three largest consultants — Aon Hewitt, Mercer and Willis Towers Watson — put together a document to address the FCA's concerns, called an "undertakings in lieu," which the FCA has rejected.
"It is a significant step for us to make this recommendation," said Christopher Woolard, executive director of strategy and competition at the FCA, in the statement. "We have serious concerns about this market and believe that the CMA is best placed to undertake this work."
"Investment consultancy services play a significant role advising pension fund trustees when they are procuring asset management services. It is important that trustees can be confident they are getting good quality advice and value for money from their investment consultants," added Mr. Woolard.
The FCA said up to £1.6 trillion ($2.1 trillion) of assets are affected by the advice of the 12 largest investment consultants.
In a separate notice on its website, the CMA said it had launched an independent investigation to "determine whether there are any adverse effects on competition in this sector. If any are found, it will decide whether — and if so, what — remedial action should be taken to address these."
The CMA said it will gather a large amount of information on the market, including running a market survey, and will engage with key participants. It will also undertake "significant economic analysis before coming to its conclusions."
The authority has sent out requests for information to the main companies involved, and a statement setting out its proposed focus and potential remedies will be published shortly. The CMA will conclude its investigation by March 2019.