On 5 November, following an in-depth investigation, it concluded that “the loss of competition brought about by the deal could lead to investment platforms, and therefore UK consumers who rely on these platforms for administer their pensions and other investments, facing higher costs and lower quality services”.

The CMA added that the findings were based on data and internal documents supplied by FNZ and GBST, as well as “extensive information provided by a wide variety of customers, competitors and other stakeholders”.

The watchdog said it took into consideration “a number of remedies” but ultimately concluded that “requiring FNZ to sell the entire GBST business is the only solution”.

When contacted by International Adviser, a spokesperson for FNZ said: “We note that the CMA has published its final views on FNZ’s 2019 acquisition of Australian software company, GBST.

“We have no further comment at this stage.”

Timeline

The acquisition was inked in July 2019 and saw FNZ buy 100% of the shares of its rival.

But the competition watchdog intervened in March 2020 to express concerns about how the deal would affect the market.

The merger of the firms was blocked by the CMA in early August; with FNZ clapping back later that month, arguing that the CMA’s claims regarding a lack of competition come from its “narrow” view of the retail market, which is “at odds” with the evidence. 

‘Perfectly entitled to do…’

Martin Coleman, who headed up the CMA inquiry group carrying out the investigation, commented: “We have found that FNZ and GBST are two of the leading suppliers of retail investment platform solutions, and that they compete with each other closely and face few other suppliers of similar standing.

“The merge has substantially reduced competition in this sector.

“This matters to the millions of UK consumers who hold pensions or other investments. This is because competition plays a key role in driving price and quality.

“Without healthy competition, costs could go up and service quality could get worse.”

Coleman concluded: “FNZ chose to complete its acquisition of GBST without first seeking merger clearance in the UK, which it is perfectly entitled to do.

“This came with the risk that the CMA could call the case in for investigation and that, if competition concerns were found, FNZ could be required to see off all of the business it had just acquired.”

Earlier this month, the regulator said that allowing the two firms to combine would significantly decrease competition in the market, by creating the largest retail wealth tech supplier in the UK. 

The CMA added that, combined, the two companies hold nearly 50% of the market. 

But FNZ argued that the CMA’s claims regarding a lack of competition come from its “narrow” view of the retail market, which is “at odds” with the evidence. 

The M&A deal between FNZ and GBST was agreed in July 2019 and has been under scrutiny ever since. 

Not backing down 

The wealth tech business claimed that the regulator did not take into consideration firms catering to the non-retail market, as “platform customers are the same or very similar” between the two, with a vast choice of alternative providers. 

The firm also rebuked the CMA’s claim that it is a close competitor of GBST’s, and that any loss caused by the merger could only be the “constraint exercised by FNZ on GBST” and the impact on the latter’s clients, rather than on the wider retail wealth tech market. 

The watchdog proposed a series of solutions to FNZ, which include selling part or the entirety of GBST. 

But FNZ claimed the measures were “unreasonable and disproportionate”.

This is because FNZ believes there are other ways through which it can address the regulator’s concerns that are “less onerous” and “fully effective”. 

Contradictions 

Surprisingly though, GBST sided with the competition regulator. 

In its response to the CMA, the tech provider said: “GBST agrees with the CMA’s preliminary view that a full divestiture of GBST would represent a comprehensive and effective remedy to all aspects of the significant loss of competition and resulting adverse effects that the CMA has provisionally found. 

“In fact, a full divestiture of GBST is the only appropriate remedy, as this represents the smallest viable, standalone business that can compete effectively on an ongoing basis with FNZ.” 

The firm’s reply goes against all the arguments put forward by its acquirer FNZ. 

International Adviser contacted the CMA, but the watchdog did not provide a comment in time for publication. 

The two fintech firms were supposed to unite after FNZ agreed to buy 100% of GBST’s shares in July 2019. 

But in November, the CMA started an investigation into the deal as it was worried it would decrease competition across markets in the UK.  

Following the initial investigative phase, the authority found that “FNZ and GBST are close competitors in what is a concentrated market with few other significant suppliers.  

“Smaller or less well-established firms find it difficult to enter or scale up because of the risks and reluctance of customers to change suppliers.” 

Customers could lose out 

Joel Bamford, senior director of mergers at the CMA, said: “Investment software is critical to the operation of retail investment platforms which are used by many investors in the UK. 

“FNZ is already the largest supplier and has purchased an established rival who is trusted by many platforms, with few remaining competitors left in the market.  

“We are therefore concerned that this transaction could lead to customers losing out.” 

The regulator has given FNZ a mere five working days to address its concerns. 

Failure to do so will result in a further investigation into the merger, the CMA said. 

This comes after Edinburgh-headquartered FNZ agreed to buy 100% of the shares in GBST Holdings in July 2019. The deal was completed in early November 2019.

GBST shareholders will receive a total cash consideration of A$3.85 (£2.17, $2.66, €2.39) per GBST share, which values the deal at approximately A$269m.

CMA made an initial enforcement order on 14 November, citing section 72 (2) of the Enterprise Act 2002.

Lessening of competition

It said in the order: “The Competition and Markets Authority has reasonable grounds for suspecting that it is or may be the case that Kiwi Holdco CayCo, including its subsidiary FNZ (Australia) Bidco and GBST Holdings have ceased to be distinct.

“The CMA is considering, pursuant to section 22 of the act, whether it is or may be the case that a relevant merger situation has been created and whether the creation of that situation has resulted or may be expected to result in a substantial lessening of competition in any market or markets in the UK.

“The CMA wishes to ensure that no action is taken pending final determination of any reference under section 22 of the act which might prejudice that reference or impede the taking of any action by the CMA under part 3 of the act which might be justified by the CMA’s decisions on the reference.

“The circumstances set out in section 72(6) of the Act do not apply and the reference has not been finally determined in accordance with section 79(1) of the Act.”

Full cooperation

The enforcement order made by the CMA will pause any action by GBST and FNZ to integrate their businesses as they have now been banned from pursuing anything which will impair the firms’ individual abilities to compete independently.

A spokesman for FNZ said: “FNZ will cooperate fully with the CMA to provide all the relevant information and will operate the two businesses separately pending completion of the review.”

Timeline

It has not set a date for its inquiry or deadline for its phase one decision.

The date for the latter is “the current statutory deadline by when the decision will be announced”.

“If any change occurs, the information is refreshed as soon as practicable,” the CMA said in the order.

“However, the CMA cannot guarantee that the decision will be announced on or before this current deadline, as the deadline of a given case may change during the merger assessment process due to different reasons.”

The move marks the “final step” in the authority’s reform of the investment consultancy and fiduciary management sectors, after its investigation found “significant competition” concerns.

Changes required

The CMA is ordering fiduciary managers – those who make investment decisions on behalf of trustees – and investment consultants to provide much clearer information about what their customers are getting for their money.

It is also forcing pension scheme trustees to “shop around” for the best deal to suit their needs.

The order requires:

• Pension scheme trustees who wish to delegate investment decisions for 20% or more of their scheme’s assets to run a competitive tender when first purchasing fiduciary management services. This means they must ask at least three fiduciary managers to bid for the work and they can then select the best deal for their needs. The CMA’s investigation found that many trustees used only the fiduciary management service offered by their investment consultant, without exploring alternatives;
• Pension scheme trustees who have already appointed a fiduciary manager for 20% or more of their scheme’s assets without a tender to put the service out to tender within five years; and
• Fiduciary management firms provide potential new customers with more information on their fees and performance, so clients can compare service providers.

The firms must also provide more information on their fees to their existing clients.

Trustees, fiduciary managers and investment consultants have six months to ensure their practices are in line with the order’s requirements. If they do not comply, the CMA could take them to court.

Lacking information to assess

John Wotton, chair of the CMA investigation, said: “Millions of people rely on pension scheme trustees to invest their savings effectively – which is why it’s so important that trustees shop around for the best deal for them.

“Our investigation found that many trustees lack the information needed to assess and compare investment consultants and fiduciary managers, meaning they may not be getting the best value for their members’ money.

“By putting the requirements of our investigation into law today, we will increase competition and make sure these markets work better for UK pension beneficiaries.”