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Reforming polarisation
John Jeffery, a member of the insurance consultancy team in Barnett Waddingham's London office examines the FSA's proposed new regulations for packaged investment products.
January 2003 saw the publication by the FSA of its proposal for new regulations for the sale and advice of "packaged investment" products (mainly life and pension products). The main aim of the changes is to make the marketplace more competitive and thereby improve benefits to consumers.
The initial impetus for change was a report in 1999 by the Director General of Fair Trading (DGFT), which concluded that the current sales regime, known as polarisation, had not given the consumer benefits expected. The FSA has since announced its desire to overhaul the regime, following a series of consultation documents with the industry. The latest consultation CP166 provides a draft set of rules which it seems likely will form the basis of the finalised rules.
What is polarisation?
The polarisation regime, which has been in force since 1988, was primarily brought in to stop large financial institutions from using their size to manipulate the personal financial advice market.
It prescribes that those who advise on the sale of packaged products to be in one of two distinct, or polarised, camps:
What are the problems with polarisation?
The main problems experienced with polarisation are i) its complexity; many consumers don't appreciate how the different types of adviser will affect the advice they receive and are unaware of how they pay for, and the ultimate cost of, the advice; ii) there is some evidence of bias within the IFA sector towards higher commission paying products or providers; and iii) consumers within the tied sector could be sold products which were not as suitable as those of other providers to whom that particular tied agent was not tied. In light of the DGFT's report and the FSA's own investigations and consultations, the FSA have decided there is a better way to improve competition and give a better deal to consumers.
How will the new regime work?
The new rules will allow insurance firms to sell a "range" of products from other providers as well as their own or for advisers to recommend from a range of providers or from across the whole marketplace.
The "range" of products offered may encompass the whole market, a limited number of providers or only a single provider and for one adviser may vary for different groups or types of customer. It will also be possible to advise on products outside the range in exceptional circumstances. However, the same principle as at present, that the most suitable product must be recommended, must be followed.
New types of advisers
There will remain two types of advisers, appointed representatives and independent advisers.
Appointed representatives will be able to follow two routes to become authorised to advise customers: become linked to one provider and advise on the products within that provider's range (which may be just their products or also products of other providers) or apply to be authorised in their own right and then choose their own range of products.
Independent advisers, apart from having to advise on all products across the marketplace, will have to offer the option of charging customers on a fee based approach (rather than just by commission). If they don't wish to offer the customer the option of paying by fee they cannot use the term independent and will in effect be appointed representatives with a range that may cover the whole of the market.
New disclosure to customers
When polarisation is removed there will remain the problem that it was originally intended to address i.e. the possibility of large financial institutions manipulating the marketplace. To combat this there will be changes to the disclosure rules to increase customers' awareness of the status of their adviser, the scope of the advice the adviser may give, a clear explanation of the costs of products so easy comparison of products can be made and any connections the adviser may have to providers. This will include a new initial disclosure document given at the initial point of contact and a repeat disclosure document when a product is recommended.
There will be other safeguards for the welfare of customers; There will continue to be reporting by advisers to the FSA on the levels of business placement with providers and the prohibition of unfair inducements or implicit or explicit targets from any connected firm.
These changes will replace the "better than best" rule which forced advisers to show that any product they recommended from a provider owning more than 10% of the adviser's firm was the best in the market. In practice this rule simply discouraged any investment above 10% in advisers' firms by product providers.
The future
Following the consultation period, new rules will be published in the latter half of 2003 with implementation in the last quarter of the year. There will be a transitional period of six months before the rules are substantially imposed on advisers, with a further six months for a few of the more minor changes.
The proposals from the FSA are wide-ranging and will radically overhaul the sales and advice market. It is likely there will be a greater demand for fee-based advisers and the role of 'tied agents' and product providers in the sales and advice process will increase. It will particularly benefit the bancassurers in their sale of life and pension products. At the same time there will be a squeeze on the position of commission-based "independent" advisers. Whether it will improve the customer confusion issue as to the status of advisers is dubious. All in all, the changes should increase competition and hopefully bring about better advice for consumers and is a chance for the industry to improve its somewhat tarnished reputation.
John Jeffery, April 2003.