The U.K.'s Financial Conduct Authority is concerned about the investment consulting market, and wants the U.K. Treasury to consider moving consultants into the FCA's regulatory scope.
The financial watchdog is also proposing using its powers for the first time to refer investment consultants for investigation by the Competition and Markets Authority.
The considerations were outlined in the FCA's interim report released Friday, and are part of a package of potential remedies to concerns raised by its Asset Management Market Study. The study was started in November 2015.
Weak price competition in a number of areas in the £6.9 trillion ($8.7 trillion) U.K. money management industry was a key finding of the interim report.
In considering how investment consultants affect competition for institutional money management, the FCA found that while consultants' due diligence means managers are likely to meet minimum quality and operational standards, the ratings do not seem to help investors identify better performing firms or strategies.
The FCA also raised concerns over consultants' moves into outsourced CIO functions, and said it is worried about whether the interests of investment consultants are in line with those of investors.
Investment consultants also “do not appear to help smaller institutional investors negotiate or otherwise drive significant price competition between asset managers,” said the report.
Regarding these smaller institutional investors, the FCA wants the government to explore the potential benefits of pooling assets.
“The image of (the institutional market) tends to be these very large, sophisticated operators who are well resourced and capable of meeting fund managers in a very active and intelligent way,” said Christopher Woolard, executive director of strategy and competition, speaking at a press conference to launch the interim report. “And indeed there are. … However, we found there are also a very large number of very small pension schemes … and we found that their behaviors in the market mirror very closely retail investors, much less sophisticated investors, and also they are particularly reliant on investment consultants.”
Other recommendations include greater transparency and standardization around costs, and greater and clearer disclosure of OCIO fees and performance.
The regulator is seeking comments on its interim report by Feb. 20, with the final report expected to be published in the second quarter. The interim report is available on the FCA’s website.