The Competition and Markets Authority (CMA) recently published its final report on the investment consultant (IC) and fiduciary management (FM) markets and it is expected that the new ‘regime’ for
engagement with ICs and FMs will be in place around the end of the year.

In our view, there is now sufficient clarity and certainty for trustees to start reviewing their arrangements to check that they are consistent with the new regime. In addition, those trustees who have put off reviews pending the CMA’s findings can now act.

Trustees should review the CMA’s recommendations and identify any findings that are relevant to their scheme. Key considerations or actions may include:

• Reviewing existing IC and FM objectives. Are they: appropriate given their scheme’s context, clear, realistic and measurable. Having clear objectives is essential for all schemes and if a scheme is likely to have an obligation to conduct a tender process, having a well-defined set of objectives will help to make the process is efficient.
• Reviewing which governance model is appropriate. Ensuring that investment arrangements and the governance approach used are consistent is essential. For schemes that accept the need for complex investment arrangements but have limited internal resources, FM is likely to be the right solution; for schemes that require a straightforward investment structure it may represent an unnecessary expense.
• Conducting an FM re-tender. Schemes that are required to tender an existing FM mandate should take care not to treat this as a compliance exercise, nor to automatically put the tender off for the maximum allowable period (five years). Instead, the process will provide an opportunity to add value by re-affirming the reasons for appointing an FM, to sense check how their scheme’s needs have changed and to assess the effectiveness of the incumbent provider relative to the competition. In addition, FM fees have fallen significantly over the last few years so reviewing sooner rather than later is likely to reduce ongoing costs.
• Designing an ongoing review programme. Although more detailed regulatory guidance is awaited, we anticipate that there will continue to be a requirement to conduct regular reviews of ICs and FMs. Many schemes will conduct these reviews every three to five years, but annual ‘light touch’ reviews and more regular input from a third party can also be helpful.

Many schemes will be affected by these changes, and trustees should act sooner rather than later to identify the impact on their scheme and develop an action plan. Given the range and potential complexity of the issues to be considered, many trustees are likely to find it helpful to use an independent third-party evaluator to support them through reviews and any subsequent changes.

The CMA produced its long awaited ‘Provisional Decision report’ this week (330 pages plus a 168‑page appendix).

In short, its key finding was that, whilst the market is not overly concentrated and hence uncompetitive, there are a few things that could be changed to make it more competitive. Some of these relate to the behaviour of investment consultants and fiduciary managers; most of them relate to improving investment governance generally. The CMA notes that more engaged trustees get better results. Or to put it another way – better governance gets better results – not a surprise to Muse of course!

So, what does the CMA say should be done? Improve governance by:

• compulsory tendering when appointing a fiduciary manager and compulsory retendering of some existing mandates
• forcing combined investment consulting and fiduciary firms to make it clear when they are pushing their own products
• introducing standards for performance reporting and more detailed fee breakdowns
• ensuring that trustees set clear objectives for their investment consultants

To help trustees, the CMA suggests that The Regulator should provide guidance on tendering and the FCA’s remit should be extended to cover more services provided by consultants and fiduciary managers.

The CMA has stopped short of forcing a structural change on the industry (for example outlawing combined investment consultants and fiduciary managers).

We think that the proposals are proportionate to the issues identified and, if implemented well, the governance enhancements should help to improve outcomes. Implementation will be key of course. In particular: any new tendering process must be robust. It must be a proper review and not simply become a ‘box-ticking’ exercise. Where existing mandates are being re-tendered, anything other than a proper review is likely to result in an FM provider’s unwillingness to participate. New performance and fee information also needs to be understood and used in the right way in decision making. The investment consultants themselves have a role in ensuring that their trustee clients have clear objectives.

A lot of trustees have, understandably, put off reviewing their investment arrangements in anticipation of the CMA review. The remedies being proposed do not appear to be too demanding for the industry overall and we expect them to be adopted. Trustees who were waiting for the outcome should therefore wait no longer; good governance dictates that action should take place now.