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Our view on the City regulators’ pension consultation

As the UK’s Competition and Markets Authority approaches its initial conclusion, Charles Stanley Asset Management calls for an industry-wide code of conduct.

Bob Campion

in Features


Seven months ago, the UK’s Competition and Markets Authority (CMA) opened an investigation into investment consultants and fiduciary managers, prompting widespread speculation about radical changes to come.

Investment consultants provide advice to pension funds on investment strategies, asset allocation and fund manager selection.  Along with asset managers some of these consultants also take a much bigger role, actively managing investments on behalf of the pension scheme. This service is called ‘Fiduciary Management’.

The CMA has published a series of papers seeking views on the interaction between pension trustees and the City. There are number of reasons for this, but it really boils down to the imbalance of knowledge between those seeking advice or management services – usually pension fund trustees – from City experts. The regulators want to ensure that pension funds are treated fairly by the Square Mile.  

The Financial Conduct Authority (FCA) thought it was necessary to look at the sector because there were signs that the buyers of investment consultancy may not be best placed to judge quality or value for money of the service they receive. It was also felt that there were signs that the biggest players held a large share of the market, which could be a sign of restricted competition as there may be barriers to expansion that restrict smaller, newer firms from developing their business. It also wanted to ascertain whether there are any conflicts of interest relating to the other services offered by a number of firms.

Starting from a blank sheet of paper, the CMA has moved rapidly and is now on track to deliver its provisional findings in July. What we know so far is that the CMA has not found evidence that the market for investment services to pension funds is overly concentrated in terms of providers. But the balance of power between product providers and product buyers needs to be improved so the right decisions can be made by trustees.

In our response to the latest working papers, we have set out our belief that a Fiduciary Management Code should be established.

Charles Stanley Asset Management’s Fiduciary Management Service has been running since 2009, and in that time we have witnessed the rapid growth of an evolving industry. With a wide range of often very different services now available to trustees, we believe the time is right to harmonise working practices.

In order to meet these aims, we believe that the industry should be asked to adopt a Code that governs a range of working practices. We think a “Fiduciary Management Code” should be sufficient in scope to tackle the concerns addressed so far by the CMA – such as transparency of fee information, presentation of performance and inconsistencies in tender processes. However, it should also be flexible enough to deal with any differences in working practices that mean sticking to a rigid code may be impractical.

This “Fiduciary Management Code” could operate in a ‘comply or explain’ basis in a similar manner to the Financial Reporting Council’s (FRC) Stewardship Code, which improves the quality of engagement between investors and listed companies. Firms would be required to sufficiently explain why their practices are different from those in the Code. It would also be vital that pension trustees would be provided with guidance on how to use the Code.

We maintain the belief that for the vast majority of defined benefit pension schemes – particularly those with limited investment expertise and governance resources – fiduciary management provides an efficient, cost effective way to implement the sophisticated long-term investment strategies that are needed.

It is largely down to lingering suspicions around conflicts of interest and lack of transparency that the majority of schemes have not yet changed from their incumbent investment consultant model.

If the CMA ultimately concludes that it has no significant concerns, then confidence in the fiduciary management model will be improved. If, however, the CMA is able to go further and adopt the measures described above or similar – a Code of Practice for fiduciary managers with guidance for trustees – then we believe this will be a significant step forward and one that is likely to benefit pension schemes as a whole.

Bob Campion is a Senior Portfolio Manager and Head of Fiduciary Management at Charles Stanley Asset Management.

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