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U.K.’s CMA explores potential conflicts of interest for outsourced CIOs

Investment consultants might be required to split their advisory and fiduciary management businesses in order to address potential conflicts of interest under proposals by the U.K.'s Competition and Markets Authority.

In the third of its series of work papers related to an investigation into investment consultants, the U.K. competition watchdog outlined a number of potential remedies to issues arising from consultants that provide both consulting and fiduciary management — or outsourced CIO — services.

The paper addresses a "theory of harm" that "when investment consultancy firms act as advisers to their customers and also offer (fiduciary management) services, customers are steered towards consultants' in-house (fiduciary management) services, when an alternative solution or deal could have been in their best interests," the paper said.

The CMA found in its own survey and from other sources that firms have had some success with strategies to sell fiduciary management services to existing investment consulting clients. About half of pension funds buying fiduciary management services choose to appoint one that is already their investment consultant. The paper said that of outsourced CIO hires won by the three largest investment consultant and fiduciary management providers, 71% already provide the investment consultant services. "Therefore it would appear that any competition issues in this area potentially impact a large part of the sector," the paper said.

The CMA acknowledged that consultants in its sample that offer fiduciary management "have policies and processes in place to help them manage conflicts of interest that may arise in their businesses. A step that many ... firms take is that they will not act as a third-party evaluator and will not compare their own (fiduciary management) service to those of rival (providers)."

It also said fiduciary management might bring benefits to pension funds, and that in some cases an investment consultant providing these services might bring further synergies and benefits. "However, we found wide agreement that this arrangement also leads to potential conflicts between the interests of (these) firms and those of the clients that they advise, which need to be managed effectively. It is not clear whether existing (Financial Conduct Authority) regulation fully addresses these potential conflicts of interest," the paper said.

The CMA's survey also showed a split in the perception of a conflict of interest, with 30% of pension fund trustees thinking investment consultants steering clients into their own fiduciary management services is "a problem that is generally well managed." However, a further 30% think it is a problem and more should be done to address it.

The CMA suggested a number of remedies to potential problems. These include requiring firms to sell their consulting or fiduciary management businesses, which "would directly address the conflicts of interest present in the sector and ensure there are no indirect incentives to recommend (fiduciary management) services to advisory clients."

Other suggestions include compulsory searches by pension funds on the first adoption of fiduciary management; trustee reporting to participants or The Pensions Regulator; and the prohibition of cross-selling advisory and fiduciary management services.

The CMA is seeking feedback and input on its working paper and potential remedies.