The UK Financial Services Authority has confirmed that it will proceed with the abolition of the polarisation regime and expects to publish ...

The UK Financial Services Authority has confirmed that it will proceed with the abolition of the polarisation regime and expects to publish draft rules to implement its decision in January 2003. The regulator said the so-called 'better than best' rule would be abolished. This rule effectively prevents an independent intermediary firm from recommending a product from any provider which owns ten per cent or more of the firm. Appointed representatives will continue to operate with a single principal for investment business purposes, but introducers dealing with authorised firms are to be excluded from the single principal rule.

An FSA spokeswoman told Complinet: "We wanted to end the speculation, so that firms can start planning. In the meantime, we are looking at ways of raising public awareness. People perhaps think they understand the way advice is provided but, in truth, they generally do not until they have received it. We are planning ways to go beyond mere leaflets and have been working on approaches with the Citizens Advice Bureau."

Adam Samuel, independent compliance consultant, said: "In essence there were no real surprises — except in the timing — about Howard Davies' remarks. After all, the FSA had already announced its back-down over requiring independent advisers to charge exclusively by fees. All that was left was to extend badging of products to a full range of financial services and multi-ties.

"Badging was introduced last year for stakeholder and is utterly harmless. It enables the smaller life assurers to have a full range of products without the inevitable growing pains of developing new ones themselves. In that limited sense, consumer choice has been increased. The ugly sisters of all this are the multi-ties. Howard Davies did not explain how the FSA's authorisation process was going to cope.

"More importantly, the existing CP121 proposals would protect product providers from liability for the activities of multi-ties. This does expose the system to abuse. Providers can sign up distribution channels on condition that the advisers are tied to more than one company. The likely effect of all this is an increase in defaults and compensation payments from the Financial Services Compensation Scheme.

"That presupposes that firms will want to be multi-tied. It will be interesting to see if firms will really want to be the worst of all worlds: not independent and not tied. At least the tied firm can claim greater expertise in the products of the provider."

The new initial disclosure document proposed for multi-ties is likely to have the same limited impact as its predecessors. Very few customers understand tying, as every piece of research into the subject shows. The addition of multi-ties is just going to confuse things further, Samuel added.

"As for the rest, the abolition of the 'better than best' rule may put IFAs now owned by providers [under pressure] to recommend their products. There has already been some trace of that in the market recently. Any IFA that succumbs to that is acting in a non-compliant way and knows it. What impact it will have, though, on IFAs' ability to attract capital is hard to tell. There is a real danger that the history of bancassurance could be repeated here. Providers and IFAs are very different animals. In the same way that banks have failed to obtain good returns from buying insurers because they tried to impose their own type of cautious culture on what is essentially a risk-based business, providers could end up clogging up the individualistic style of most good IFAs.

"The FSA doesn't seem to be intending to issue a consultation paper until January. So we needn't get too excited just yet. It proposes to launch a public awareness campaign to support its proposals. The only one I can remember working was the one with ice-cream van adverts that led ice-cream salesman to complain about the advertising and millions of other people to request reviews leading to billions of pounds of pension review compensation. Is this an omen?"

The Consumers' Association has kept up its tirade of invective against the regulator by warning that depolarisation will mean an increase in the power of the big banks and insurance companies and a reduction in the availability of independent, impartial advice.

In addition to a reduction in the availability of impartial financial advice, the CA predicts an increase in the cost of financial products, a reduction in the quality and choice of products, and confusion in the market caused by multiplying the different types of advisers.

The association urged the FSA to delay its execution of the proposals until the launch of the Sandler stakeholder product. It also demanded that 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'. It said new rules on disclosing the costs of advice and the products should apply equally to all advisers.

The Consumers' Association said: "We are disappointed by aspects of the decision, which will only serve the interests of the major banks and insurers and not the millions of us that need a fair and affordable system of advice. By allowing banks and insurance companies to purchase IFAs, where the primary obligation is the needs of the consumer, the future of impartial advice looks bleak.

"Removal of the 'better than best' rule, which prevents firms from selling their own products unless they are better than any other, puts consumers at risk of being sold inferior products which do not cater for their needs."

The Association of Independent Financial Advisers lamented the passing of polarisation, but said a disaster had been averted when the FSA decided not to proceed with its proposed defined payment system.

Lord Hunt, chairman of AIFA, said: "I am saddened by the FSA's decision to reform the polarisation regime. It has been the cornerstone of consumer protection for fourteen years. Clarity is its main advantage. Currently, advisers are clearly divided into two categories: tied or independent. Now there will be advisers who are tied to, or have contractual arrangements with, as many product providers as they wish. A robust status disclosure regime needs to be put in place so that consumers are clear about the nature of the advice they are receiving."