Rewriting the regulatory rulebook

Rewriting the regulatory rulebook

In order for pension scheme members to get the best possible value out of their retirement savings, it is vital that the institutional investment chain is competitive and transparent.

UK schemes have £1.9tn of assets under management in the UK, comprising 57% of all UK institutional business undertaken by the investment management industry; pension schemes, therefore, have an important role to play in the debate on this sector.

There have been long-standing concerns from pension funds, the government and others about the alignment of interests within the industry, compounded by a lack of transparent, clear and consistent disclosure of charges.

The combination of these issues has made it harder for trustees to properly scrutinise the value for money of their consultants and managers.

There was, therefore, support from across the institutional, as well as retail, investment chain when the Financial Conduct Authority (FCA) decided to investigate the investment management sector 18 months ago, as well as when it published its final report and recommendations on the June 28.

The FCA’s proposed remedies focus on three specific areas: giving protection to investors that are less able to find value for money; driving competitive pressure on asset managers; and improving the effectiveness of intermediaries including investment consultants and investment platforms.

Yet in a final report package that contains several consultations with promises of more to come and some recommendations that can be taken forward now, what stands out?

Probably the most high-profile issue has been the decision to consult on a possible referral of the investment consultancy sector to the Competition and Markets Authority (CMA).

The three largest consultancies had previously presented undertakings in lieu (of a market referral) to the FCA, proposing a package of measures aimed at improving transparency and resolving conflicts of interest in the sector.

In its final report, the FCA has provisionally rejected these undertakings in favour of a market referral and is now in the process of seeking views on its decision, which we expect in September.

Another key recommendation was that the provision of investment consultant and employee benefit consultant asset allocation advice be brought within the regulatory perimeter of the FCA.

The timescale on developments in this area will depend on whether or not the market referral goes ahead.


The final report also directed the Department for Work and Pensions (DWP) to continue its work to break down barriers to pension scheme consolidation.

This reflected the PLSA’s findings, as part of its Defined Benefit Taskforce research, highlighting the link between scale and good governance; building scale can help provide the resources to challenge, or exercise greater negotiating power over, investment advisers and managers.

Finally, the report made a series of recommendations on governance, including requiring authorised fund managers (AFMs) to appoint independent directors to the board and introducing a specific rule requiring these boards to assess value for money using a variety of metrics.

Although the general thrust is to be welcomed, we think more could be done on the specific factors used to evaluate value for money, as well as the benefits of mandating an independent chair of the AFM board.

After 18 months, many in the industry may have been hoping for some sense of closure from the final report. However, while some conclusions have been definitively drawn, a great deal of further work, consultation and investigation remains.

Now is the opportunity for the industry to help the FCA produce workable regulation; at the PLSA, we will be bringing consultants and their pension scheme clients together on this issue to work with the FCA and build a market which works in the interests of all, and especially scheme members.

Caroline Escott is the defined benefit and investment policy lead of the Pensions and Lifetime Savings Association

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