The Financial Conduct Authority (FCA) has asked the Competition and Markets Authority (CMA) to investigate competition levels in the investment consultancy and fiduciary management sectors.
The City watchdog said it has the power to investigate when it suspects competition levels are “prevented, restricted or distorted”.
It said in the investment management and fiduciary services markets it believes the markets have been distorted in three ways.
The organisation said competition is not particularly being driven by customers of these services, with pension trustees “relying heavily on investment consultants but having limited ability to assess the quality of their advice or compare services”, with this leading to low switching rates.
The FCA added that the investment consultancy and fiduciary services market is “concentrated” with the largest three firms holding between 50 to 80 per cent market share.
The FCA stated barriers to expansion are restricting smaller and newer consultants from developing their businesses.
The organisation said “vertically integrated” business models are also creating conflicts of interest.
In instigating this investigation the regulator stated it is rejecting proposals made to it by the three largest investment consultants (Aon Hewitt, Mercer and Willis Towers Watson) to address competition worries.
Christopher Wollard, executive director for strategy and competition at the FCA, said: “We have serious concerns about this market and believe the Competition and Markets Authority is best placed to undertake this work.
"It is important that trustees can be confident they are getting good quality advice and value for money.”
Andy Agathangelou, chairman of the Transparency Task Force, said: “Every right-minded financial services professional must surely want a competitive, vibrant and conflict-free financial services market and that is what this decision is all about.
"By managing out conflicts of interests and anti-competitive behaviours and by helping to ensure that all those who should be regulated are regulated. Only then can we properly repair the self-inflicted reputational damage the sector has suffered for decades.”
In the FCA's asset management study, published in June, the regulator requested the power to regulate investment consultants due to concerns about conflicts of interest among these businesses.
The regulator raised a concern that gifts and hospitality from asset managers could create conflicts of interest for investment consultants that provide asset manager ratings and recommendation services to investors.
Questions were also asked about investment consultants providing these services to investors while at the same time providing consultancy services to asset management firms.
Specifically, the FCA flagged there were concerns that any revenues investment consultants earned from asset managers could create conflicts of interest.
Some investment consultants reiterated to the FCA that they have processes in place to ensure asset managers’ gifts, hospitality or revenue from providing services did not affect their advice while others argued the outings and presents they received were “insignificant and declining.”
However the regulator stated it was still concerned receiving rewards was resulting in certain fund houses receiving higher ratings.