Depolarisation set to come into force By Isabel Berwick
Financial Times Published: November 19 2004 17:46
Depolarisation hasn't exactly caught the public imagination in the same way as (say) the imminent start of the new series of I'm a Celebrity, Get Me Out of Here. For the financial services industry and its customers, though, the new financial sales and advice regime that comes into force on December 1 will have a significant impact.
First, it will give consumers even more choice in the type of financial advice they can get. Second, they will be told more about the costs of their financial plans. That may be through paying fees for the advice given, through commission payments that will erode the amount of cash available for investments, or through a mixture of both kinds of payment.
Under depolarisation, as well as the existing two types of financial advisers those who sell the products of one firm, and those who are independent there will be a new "third way". This will comprise advisers and institutions selling from a small panel of selected providers. In practice, this multi-tie adviser will be what's offered on the high street through the vast branch networks of banks and building societies.
It is likely to be a better deal for many "mass market" customers who have previously automatically gone to the bank for financial advice, only to be sold a lacklustre range of own-brand products.
Barclays' managing director of financial planning, Jim Reeve, prefers to call the new set-up "select choice" for customers. "The vast majority of people want value for money products, probably from a company they have heard of."
The buying muscle of the big banks will mean huge potential market for the likes of Standard Life, Prudential and Legal & General. The rise of multi-manager investment planning, where several top-performing investment names are held under one umbrella investment plan, means that choice should improve for many customers.
But there's plenty of debate about whether customers looking for a good independent financial adviser actually want, or can cope with, more choice. Stuart Fowler, business consultant and author of books and papers on the financial services industry, says: "It will definitely be more confusing for people. They will have to grapple with three sets of advice types instead of two."
The second big change coming with depolarisation is a new requirement for advisers to give a "menu" to customers about the firm's charging structure. This runs to several pages.
Such is the overload of upfront information about costs of one kind or another (all of which will be handed over at a first meeting with a financial advice contact) that it should at least be impossible for consumers to believe as they often have that financial advice and products bought from advisers are somehow free of charge.
Nick Johnson, director of distribution change at insurer Norwich Union, says: "The idea is to give customers a discussion about what they will pay. There is an argument that customers think products are free, and the FSA wants complete disclosure. Currently, commission is disclosed to customers at the end of the sales process. This brings it to the front."
This costs "menu" should be offered by all financial salespeople and advisers by June 1 2005. Among the figures on offer in each costs "menu" will be sample commission payments or charges on various products such as collective investments and annuities. The company has to show its maximum charge for each deal against an industry average. This is supposed to give consumers room to haggle or question the adviser's charges.
These depolarisation changes are all a Financial Services Authority production, but in this instance the changes weren't triggered by the regulator. In 1999 an Office of Fair Trading (OFT) report concluded that the financial sales climate in the UK was significantly anti-competitive.
The regime dates back to 1988, when the regulator, the Securities and Investments Board (Sib), brought in a change called "polarisation" (hence the even less-lovely "depolarisation" in 2004). Under polarisation, there are only two types of financial adviser. They are people selling products from one firm; and totally independent advisers who are supposed to scour the whole market in search of best deals for customers. (In practice many commission-based IFA firms work from a panel of preselected providers for each product.)
But even in 1988, some prescient commentators, notably Barry Riley of the Financial Times, suggested that, to have any value for customers rather than for the convenience of the financial services industry, polarisation should have been worked out from the client's point of view.
Riley wrote at the time: "The division should have been between those intermediaries paid by companies and those paid independently by the client (and only by him)." If this had been adopted it would have been easy to spot truly independent advice. Instead, what we got in 1988 were overwhelmingly commission-driven advisers working in both tied and independent sectors. Mick McAteer, principal policy adviser at Which?, says the 2004 changes are another missed chance to ditch commission bias, and they could even make things worse. "The danger is that the big banks will create the impression of independent advice even when it hasn't been given. It is all a bit of a disaster. The FSA should be sorting out the commission bias and all the things that distort the market."
In fact, the FSA did come up with a radical set of changes under the depolarisation banner. But, under intense industry pressure, the regulator watered down the proposals. IFAs are still allowed to call themselves independent even if they are paid by commission. They just have to offer clients the chance to pay by fee, if they wish.
The finished set of rules may be an imperfect and complex set of changes, but seasoned industry observer Stuart Fowler believes that depolarisation should still be viewed as a small part of a much broader and more radical agenda being pushed forward by the FSA.
It's a new world order that will benefit consumers, he says. "What is good is that so much is going on, and it is going in the right direction. The FSA is really doing things towards its objectives of having better educated consumers, making better decisions. It is all good stuff."
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