While the CMA referral applies mainly to the ‘big three’ investment consultants that advise close to 60% of the institutional investment market – pension funds and the like – it could also have repercussions for advice in the retail space, especially if the FCA sees fit to address the conflicts of interest it has started to identify.
Indeed, already under the eagle eye of the watchdog, fund rating agencies have been singled out for their potential conflicts of interest in the FCA’s probe into investment platforms, which closed to public responses on 8 September.
In this the regulator made clear it will “assess whether relationships between investment platforms and other platforms, advisers, asset managers, and fund ratings providers, work in the interests of investors”.
Level the playing field
Andy Agathangelou, founder of lobby group the Transparency Task Force (TTF), believes there is no doubt that fund ratings agencies will, and should, eventually come under the FCA’s remit. But, he believes it will first establish control in the institutional space, where millions of people’s retirement savings in pension schemes are at stake, before moving into retail.
“What does not make sense is to have an uneven playing field in the institutional and retail space,” he adds. “Where does it makes sense for someone to be treated ‘really well’ by the institutional market and suffer misfortune for ‘just’ being a retail investor?”
To Agathangelou, regulating the fund ratings agencies is a no-brainer because these organisations have an “incredibly important influence” on the decisions being made by institutional and retail investors, but that is somehow escaping the regulatory net.
“It would almost be like an MOT inspector saying ‘we will do the brakes, tyres and suspension, but we won’t bother doing the seatbelt on the rear left seat’,” he says. “Where is the sense of stripping out an important part of the analysis process? What makes sense is for the regulator to regulate all the important bits, including the seatbelt on the rear left seat.”
Agathangelou also believes the FCA will conduct the platform study as “thoroughly and impressively” as it did the asset management study and as such, leave no stone unturned in its quest.
Opening the door
Rory Maguire, co-founder at ratings provider Fundhouse, says while competition dynamics are different in the ratings space, the FCA does appear to have highlighted the same type of issues inherent in the institutional advisory model: a lack of regulation, a lack of added value and a conflicted business model.
“If the FCA sees raters as being highly influential with respect to client outcomes then I fully expect they may focus on raters because the underlying issues seem almost identical, placing competition to one side,” he says.
Maguire adds, put another way, if ratings businesses were listed, the recent findings of the FCA would have caused a large drop in their share price.
“We have long said that the door opens from the outside, not the inside – we cannot expect the ratings businesses to reform their own business models because they are too easy and the vested interests from the fund providers remains high too.
“So, if the model is to become unconflicted, the FCA, in our view, likely holds the keys to making that change.”
Elsewhere, Darius McDermott, managing director at Chelsea Financial Services, and MD at fund ratings agency, FundCalibre (FC), accepts the regulator is gunning for ratings agencies in its platform paper. However, he is relaxed because Chelsea’s regulated nature means the ‘actions and behaviours’ are the same for FundCalibre .
Another reason for this coolness is the fact that the heart of FC’s rating is a proprietary quantitative screening tool and unless a fund passes that screen, it cannot be considered for a rating. Put simply, FC rates funds first then seeks licences.
“Our universe is funds and trusts that show consistent alpha generation with low volatility of that alpha so we are aware these things are being looked at, but Towers, Aon and Mercer have other issues that should be looked at,” McDermott says.
For now it seems the big institutional investment consultants have the most reason to sweat, but in the retail space people are starting to get hot under the collar over whether fund ratings agencies will also have to defend themselves to the CMA down the line.
Much will become clearer once the FCA has digested responses to the platform study and made its findings public, but whatever outcome is reached, it must be remember that the most important player in all this is the individual whose retirement or general savings could be at stake.
