The Consumers’ Association (CA) has expressed deep concern over the Financial Services Authority’s (FSA’s) recent decision to proceed with its proposals to transform the way financial products are sold.
The FSA recently announced that it is to proceed with the abolition of the polarisation regime, on which it consulted in consultation paper CP121. As a result of the decision, firms currently restricted to selling just one company’s products to customers will in future be able to offer their customers more choice. In addition, firms that wish to continue to hold themselves out as ‘independent’ can do so provided they both advise from across the market and offer their customers the option to pay by fee. Abolition of the polarisation regime also aims to make customers understand the exact nature of the advice being given and the service being offered by the firms with which they are dealing. According to the FSA, this will be achieved through a new initial disclosure document. For more information about ‘polarisation’ see the box inset on this page.
The CA claims that the FSA’s decision is “anti-consumer” and will increase the stronghold the big banks have on the financial advice market and may discourage consumers from saving for their futures.
It has warned that abolishing polarisation is an unnecessary measure and will not provide a solution to the list of problems identified by the FSA (the FSA was concerned that the polarisation rules appear to have some anti-competitive effects in the tied channel). Instead the future for consumers wishing to purchase financial products, according to the CA, will be: an increase in the power of the big banks and insurance companies and a reduction in the availability of independent, impartial advice; an increase in the cost of financial products; increased confusion in the market caused by multiplying the different types of advisers – making it even more difficult to understand where to get good advice; and a reduction in the availability of impartial financial advice.
The CA has urged the FSA to delay execution of the proposals until the launch of the Sandler stakeholder products. It has also demanded that the FSA implement the following as a bare minimum to protect consumers: the term ‘independent financial adviser’ or ‘planner’ should only apply to advisers who have a regulatory duty to search the market on behalf of the consumer and offer consumers the choice of payment by fee or commission. All other categories such as high street banks should only be allowed to call themselves ‘salespeople’; new rules on disclosing the costs of advice and the products should apply equally to all advisers; commitment to supporting a national financial advice network in tandem with the new proposals.
The FSA will be consulting on draft rules to give effect to its decisions in January.
Meanwhile, most quarters of the industry have welcomed the regulator’s decision to modify its original plans for polarisation reform by abandoning its proposal for a defined payment system (an entirely fee-based structure) as a definition of independent financial advice, and replacing it with a so-called ‘menu’ – provided in the early stages of the sales process – which would outline the services an IFA is offering and allow the consumer to choose how to remunerate the adviser, either through a fee or by commission.
According to a recent report by Swiss Re Life & Health – Insurance Report – Whose risk is it anyway? – less than 5% of UK consumers would be willing to pay a fee of £50 or more in return for advice on life and health insurance.
Paul Hately, co-author of the report and strategic development actuary at Swiss Re Life & Health, suggests that a move towards fee-based independent advice could effectively disenfranchise a large part of the population: “The harsh reality is that very few advisers could currently contemplate selling regulated products for a fee of around £50.”
He adds: “The intention is that the menu-based approach will bring greater transparency to the cost of advice. As a consequence, consumers will have a much greater involvement in assessing the value of the service provided and will be encouraged to negotiate appropriate remuneration more actively, whether through fees or commissions. However, whichever way the advice is provided, advisers must still be adequately compensated.”
What is polarisation?
Polarisation rules came into effect in 1988. These rules were made by the then regulatory authority, the Securities and Investment Board (SIB), and control the way some savings and investments can be sold. Advisers have to be either: independent (an IFA) and advise across all products and companies on the market; or tied and represent just one company and sell only its products.
Why has the FSA been reviewing it?
In August 1999 the Director General of Fair Trading (DGFT) made a report to the Treasury, which concluded that the polarisation rules restrict or distort competition to a significant extent by preventing some innovation in retail markets. The FSA Board decided in 1999 that the FSA should commission an independent study of polarisation to help inform the Treasury. The study, completed by London Economics, was published by the FSA on 5 July 2000 and broadly concluded that the polarisation rules appear to have some anti-competitive effects in the tied channel.