Reforming Polarisation

Making the market work for consumers

The Financial Services Authority (FSA) Consumer Panel held a seminar in March to discuss the FSA's proposals to change the rules about Polarisation. But what is Polarisation? The FSA explains:

The Polarisation regime applies to the selling of life assurance (other than pure protection contracts), personal pensions, collective investment schemes and investment trust savings schemes (referred to as packaged products). It does not apply to any other financial products.

Polarisation divides firms that sell packaged products into two camps. An adviser is either:

• an Independent Financial Adviser (IFA) who is an agent for and advises the customer; or
• a representative i.e. the agent of the company, who sells on behalf of the company (or group) and is restricted to selling that company's products with the company taking responsibility for the activities of its representative.

This seems to be a clear distinction which consumers of ‘packaged products' can easily understand. If the adviser is an IFA he or she works for you, if not, then be aware that the allegiance is with the product provider, not you.

Why change it? FSA's proposals to abolish this distinction do not really make clear to an untutored observer exactly why they have decided that this is the route that they want to follow.

Their proposals are that Polarisation, as such, should be abolished and replaced by requirements for new, enhanced, disclosures to consumers. With Polarisation removed, they anticipate that the market will segment into:

• provider firms which will continue to offer only their own products and are free to distribute through the tied, independent and direct channels;
• provider firms which choose to increase the range of products they offer by adopting products from other provider firms. They would be free to distribute through tied, independent and direct channels;
• distributor firms (so called to distinguish them from any current practice - this may not be their eventual title which would have to explain to consumers their status as advisors) which distribute and advise on products from a range of different providers; and 
• independent advisers responding to the continuing demand for independent advice;
• firms that wish to hold themselves out as offering independent advice should be remunerated on a defined payment basis to remove the potential commission bias; 
• limits on product provider firms investing in IFA firms which currently trigger the ‘better than best' rule should be abolished. Independent firms should disclose to consumers any stake a product provider has in the firm or in connecting firms: and 
• steps be taken to streamline the advice process and construct a buyers' guide to give consumers better information and confidence to enable them to choose the adviser who is right for them. 

The FSA also puts forward for discussion as potentially helpful for improving the functioning of the market for financial advice, whatever the way forward for Polarisation, the following measures:

• a two tier system of financial advisers, with the lower tier of less intensively qualified advisers advising on a limited range of lower risk products; and proposals for unbundling the cost of advice and marketing from the cost of the product.
• The FSA states that the aim of these proposals are to provide the same or greater consumer protection than Polarisation offers through other methods that they expect to be much less restrictive of competition.

Comments

It was clear at the seminar that ‘the trade', which was well represented, was prepared to go along with the proposals though with plenty of suggestions for improvements from their point of view. This is not surprising as the aim of the proposals, as stated above, is less restriction on competition. The Editor, who attended the seminar, suggests that there are enough safeguards built into the proposals for us to believe that the level of consumer protection will not be less than before and should be easier to understand. Whether it will be better is difficult to judge. There are three proposals which he feels NCF can support wholeheartedly.

• The first is that firms that wish to hold themselves out as offering independent advice should be remunerated on a defined payment basis to remove the potential commission bias.
• The second is one of the measures that would improve the market what ever happens to Polarisation - and is the one which proposes unbundling the cost of advice and marketing from the cost of the product.
• The third is the proposal to construct a buyers' guide to give consumers better information and confidence to enable them to choose the adviser who is right for them.

How the FSA will arrange the 'unbundling' of the costs of marketing and advertising is difficult to envisage. But they say they want to do it so, one presumes, they know how to set about it.

He does not like the idea that product providers be allowed to invest without limit in ‘independent' financial adviser firms which can then still call themselves ‘independent'. An Independent Financial Adviser should be just that. The FSA makes a point that in such circumstances the IFA must disclose the stake a product provider has to any consumers, but he thinks this is an example of muddled thinking and will cause confusion to lay consumers.

There are many detailed comments which could be made about the proposals which run to 76 pages plus substantial annexes but time and space do not allow!

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