The UK’s Law Commission has side-stepped demanding a regulatory review of the sector, despite demands from investors.
In its response to a consultation on “Fiduciary Duties of Investment Intermediaries” the independent body set up to oversee and review UK regulation said: “We have decided not to recommend a review of the regulation of investment consultants. It is important that investors are able to obtain advice easily and cheaply. Increasing the scope of regulation in such a way that makes this more difficult is likely to be detrimental for both investors and financial markets generally.”
Currently, the UK’s investment consulting industry does not fall within the scope of Financial Conduct Authority (FCA) rules if they only give “generic” advice.
The report added that as investment consultants were often regulated through some of their other activities “and will in any event owe duties of care in respect of all advice they give” it did not see an immediate need for change.
However, this response flew in the face of the majority of those who had submitted responses to the commission’s consultation document.
Strathclyde Pension Fund, the UK’s largest in the public sector, said in its response to question 20—Is there a need to review the regulation of investment consultants?—that it “would welcome a review”.
Avon Pension Fund, another public sector scheme, said: “It would seem that other aspects of the chain have far greater regulatory scrutiny or oversight.”
Several academics specialising in institutional investment agreed, while Shareholder Action, a group encompassing economic and financial foundations, and Baroness Jeannie Drake—a prominent pensions figure who has held several government advisory roles—recommended a review of the sector as a whole.
“Consultants have a direct commercial incentive to advise funds towards complexity, which may help to explain the growing complexity of pension funds’ investments strategies,” Shareholder Action’s response said. “This in turn further reduces the scope for effective fiduciary oversight of investment strategies by trustees and increases their reliance on professional investment agents.”
Even consulting firm Towers Watson agreed that there should be a review of regulation in the sector.
“The regulation of investment consultants now seems somewhat dated, with advice on the provision of pooled vehicles regulated, unlike similar advice on segregated portfolios,” the consulting firm said in its response. “Furthermore, advice on portfolio strategy can have a more profound impact on a scheme’s finances than advice on manager selection, yet it does not need to be provided by a regulated advisor. In order to help all trust‐based pension funds to get a minimum standard of advice in these matters, we would advocate that such advice be regulated.”
The Society of Pension Consultants said: “We agree that a review of the regulation of investment consultants would be justified, without wishing to pre-judge what the outcome of the review should be.”
The Association of British Insurers, which represents many investment managers, echoed the line taken by most of the fund houses that responded to the consultation with this response:
“Yes – asset allocation decisions have been found to account for a significant proportion of investment returns, over and above manager or fund selection. It is therefore difficult to justify the focus of current regulation where advice on pooled funds is regulated and advice on segregated or directly held investments is considered to be generic advice.”
Some were less keen to rock the boat, however. Mercer’s response outlined the reasons it did not feel a review was necessary. “In summary, we do not consider it necessary to extend FCA regulation to cover generic advice. Mercer chooses to apply the same best practice procedures to all of our advice. Whilst widening the regulatory regime would not alter our practices, it would likely cause a reduction in the number of sources of generic advice and information (and potentially entrench the position of the investment consultants).”
The Law Commission said that consultees had “not identified a specific risk which would objectively justify extending regulation in this area” and as such a review would not be requested.
However, it conceded that “the lack of regulation of investment consultants does appear anomalous, and we would ask that the government actively monitor this area”. It suggested one possibility would be for the government to commission independent research into the issues raised by the current regulation of investment consultants and concluded: “If specific risks become apparent, further regulation would be justified.”
A spokesperson from the Law Commission told CIO that despite the high number of “yes” responses to the question on a review on investment consultant regulation, the institution did not feel the risk to investors had hit a level where one would be required.
“There were 61 responses on the issue; 47 said ‘yes’, six said ‘no’, and eight gave other responses,” she said. “The difficulty is not the number of responses, [but] we didn’t think they showed a specific risk to investor protection or market integrity that would justify regulation under the Markets in Financial Instruments Directive. It’s quite a high hurdle and we didn’t think it had been met yet, although we did have concerns about the future.”
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