CMA investigation: Less talk, more action required

But will they have the necessary impact? Or will they result in a lot of debate but a lack of action?

Greater scrutiny of costs is also required, as well as better guidance around ongoing oversight of investment advisers

The industry has now had a chance to formally respond to the CMA investigation. While some dispute the CMA’s conclusion that there are competition issues, the majority of respondents support the eight proposed remedies.

Disagreements arise instead over the implementation of measures, such as the use of open tenders to improve the tender regime and ‘boilerplate’ warnings. Most also support greater regulatory involvement in the industry.

Trustees under spotlight

The CMA review has certainly increased trustee awareness of potential competition issues in the industry. The big question is whether it will lead to better outcomes for all stakeholders.

This ultimately depends on how the proposals are implemented. Needless to say, the group that will be most impacted by the CMA proposals are trustees, as their governance requirements will undoubtedly increase.

This is fine as long as there is a net benefit to stakeholders. However, greater scrutiny of costs is also required, as well as better guidance around ongoing oversight of investment advisers.

The good news is, a lot of the groundwork has already been done to enable trustees to act now and there are some easy wins to do this.

Trustees should target three areas:

• Identify if you will be impacted by the new tender regime

• Report on costs as a matter of priority and understand limitations

• Start planning now for DB chair’s statement

Put costs under the microscope

Total scheme costs is an area where a lack of transparency makes it difficult to conclude if there is a detriment to stakeholders. More pressure needs to be put on advisers, not just investment managers, to provide better cost disclosures.

There will never be a perfect solution for measuring and comparing costs, but sufficient material exists for trustees and sponsors to start asking for proper disclosures now.

To enable comparison of costs, a good starting point is to use the templates provided in the undertakings in lieu, in response to the Financial Conduct Authority’s asset management market study.

These templates covered fiduciary management, but there is no reason why it cannot cover other implementation models such as traditional advisory. They show fees in percentage form, but also in monetary terms – a small but extremely important addition.

Compare apples with apples

The template does overlook a few costs, such as one-off advisory fees and exit costs, so these need to be explicitly requested.

A note of caution with costs, however. When you start digging a little deeper, you quickly uncover issues such as asset management and transaction costs not being attributed in a consistent manner – this can lead to incorrect comparisons.

Furthermore, more complex fee structures such as performance fee arrangements could open the door for misstatement of fees.

To avoid this, providers should also be asked to provide comprehensive disclosures of the approach they have taken to calculating costs, including areas where assumptions have been made and/or where costs can be variable.

Don’t overlook oversight

Ongoing monitoring of investment advisers was not explicitly identified by the CMA as a remedy, likely because this is more a governance issue than a competition issue, but it as important as selecting the right provider.

Trustees, on an ongoing basis, need to be able to demonstrate to stakeholders whether they are receiving value for money.

This has always been a difficult question for the trustees to answer. However, the industry is growing up, and the remedies outlined so far along with the UILs and industry thought leadership are already providing trustees with the right tools to help them challenge their providers. It’s time to start putting these to work.

Keira-Marie Ramnath is head of fiduciary oversight and selection at PwC