The Financial Conduct Authority has asked the government to give it more power to regulate investment consultants, over concerns many such firms were unable to identify outperforming managers.
Christopher Woolard, executive director of strategy and competition at the FCA, said the request was made as part of its asset management market study, and was intended to protect the members of small workplace pension schemes.
The FCA published the market study's long-awaited interim report last week.
Speaking at an even hosted by the Tax Incentivised Savings Association on Thursday (24 November), Mr Woolard said the FCA had a number of concerns about the "relatively concentrated" investment consultancy market, particularly over value for money and potential conflicts of interest.
"Our evidence suggests investment consultants on average are not able to identify managers who offer better returns to investors," he said.
"It’s also difficult for pension funds to assess whether the advice provided by investment consultants is actually providing value for them in the long term."
On potential conflicts of interest of consultancy firms - many of which have their own asset management operations - he said: “We’ve also got some concerns whether investment consultants’ interests are actually in line with investors’ interests.”
But Mr Woolard pointed out that, unlike asset managers and financial advisers, investment consultants did not fall within the FCA's regulatory remit.
He said an uncompetitive and loosely-regulated consultancy market was a particular risk to small workplace pension schemes.
"There are quite an amazing number of very small pension funds – over 32,000 pension funds in the UK that have less than 11 members in them - and they behave more like retail investors and often achieve similar outcomes," he said.
"Their trustees are particularly dependent on the advice they receive from investment consultants."
He also raised concerns over lack of competition in the consultancy market.
"The market is relatively concentrated, with three big players accounting for lion’s share of the market. And switching rates between those investment consultants are low."
He said smaller pension schemes were particularly unlikely to switch adviser.
“For the first time we’re proposing to use our powers to make a market investigation reference under the Enterprise Act to the Competition and Markets Authority on the institutional investment advice market," he said.