UK Watchdog Turns Spotlight on OCIO

The UK regulator is to scrutinize the role of investment consultants as part of a wide-ranging review into competition in the country’s £6.6 trillion ($10 trillion) asset management industry.

“We want to understand whether consultants are incentivised to suggest strategies which may increase their business, but which may not be in the best interests of the investor.”The Financial Conduct Authority (FCA) today published the terms of reference for the review. It plans to look into how competition delivers value for investors and “whether asset managers are motivated and able to control costs along the value chain.”

The review is in response to a number of concerns raised to the regulator, including potential conflicts of interest surrounding consultants that also offer fiduciary services—or outsourced-CIO.

The FCA set out three main questions driving its approach to consultants:

1. How does advice given by investment consultants affect competition for asset management?

2. How are conflicts within the business model of investment consultants managed?

3. Can clients monitor the services provided by investment consultants?

“Where investment consultants offer these ‘asset-management type’ services we will explore how this conflict is being managed, and the impact it may have on competition for institutional clients,” the FCA said. “We will also seek to understand arrangements between the investment consultant and the asset managers who are part of fund-of-funds or multi-managers and the impact arrangements have on competition.”

The regulator will also look into the metrics consultants use to select preferred funds, asking whether they provide value for money, act as barriers to entry, and affect manager behaviour.

“We want to understand whether investment consultants are incentivised to suggest or promote investment strategies which may increase their business, but which may not be in the best interests of the investor,” the FCA said. It cited a previous survey, in which respondents suggested that consultants “may be incentivized to recommend active or complex strategies rather than passive strategies to justify the fees being paid to them.”

Christopher Woolard, director of strategy and competition at the FCA, said the regulator aimed to “strengthen the UK’s position as a major centre for asset management”.

“Asset managers provide an important economic function, bringing together those with money to invest and companies and governments that need capital,” Woolard said. “Given the significant role they play in the economy, it is essential that competition works effectively for these services.”

An interim report is planned for summer 2016, while the final report is expected in early 2017.

Related: How Do You Solve a Problem Like Consulting? & Consultants Combine to Combat ‘Conflicts of Interest’