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Rules governing the sale of financial products are set to be scrapped over the coming months, signalling the biggest shake up to the financial services sector in a decade. Michelle Perry reviews the situation.

Although most of the groundwork has been laid, there is still much to finalise. But few industry experts expect any further clarification from the Financial Services Authority (FSA), the City watchdog behind the changes, until later in the spring.

To many it indicates the end of rules which falsely split advisers into two camps, either totally independent or tied to just one product provider. Most ‘independent’ advisers in reality operate a panel system, where the vast majority of their recommendations are for products from four or five providers. But to others it signals the beginning of unnecessary upheaval and possibly the end of truly independent advice.

The changes will dismantle rules that distinguish between financial advisers
offering broad advice, who can say they are independent, and those tied to a single provider, who cannot. Polarisation refers to the structure where IFAs are the agent of the client, while a tied adviser is the agent of the insurance company to which he or she is tied.

Independent, tied or multi-tied
Under the new regime the FSA is proposing, advisers will either be genuinely independent, offering a broad spectrum of products on a fee basis, or tied to one provider or multi-tied to a number of providers. The new rules will enable “tied” salesforces, currently restricted to selling just one company’s products, to sell the products from a specified range of providers as a result of provider firms adopting the products of other provider firms.

For the Government’s and regulator’s part, the goal is to widen the choice for consumers, particularly for the millions of savers who buy financial products through salesmen employed by the banks and big insurance companies.

Effect on consumers
The regulator says there would be many benefits for the consumer in terms of greater choice, access, better value and higher quality. Improved status disclosure would help consumers better understand who they are dealing with and how their adviser is paid for the advice provided.

Industry aligned to government aims
Another aim is to enable individuals, particularly those in the low-income bracket, to save more, a growing concern of ministers. These initiatives, billed by the industry as depolarisation, are closely aligned to the Government’s plans to introduce a simple, cheap off-the-peg range of savings products and a lighter-touch regime for selling these products.

Transparency is also a cornerstone of the proposed changes. At present consumers are often baffled by the charges and the links between advisers and product providers. The Government wants a move away from commission payment to fee-based charges so clients are clear about what they are paying and to whom. In this way, say regulators, consumers will be able to more easily compare product prices.

Criticism
The hope is that increased product choice will stimulate competition in the tied sector. But the Consumers’ Association balks at this suggestion. Teresa Fritz, principal researcher at the Association, says: “In the long run it will reduce truly independent advisers into a very small sector. It will muddy the waters.”

Critics have not been silent in the long consultation process leading up to the new rules. There has been widespread criticism of the depolarisation proposals because of the fear consumers will fail to understand the difference between the types of adviser.

Niamh Prendergast, a Leeds-based partner of Ernst & Young, says: “I think it’s going to be complicated for consumers. People will have to declare their hand and say what’s happening, but many people are still trying to work out what’s happening.”

The Association of Independent Financial Advisers, which represents 75% of the IFA market, has also been outspoken against the removal of polarisation claiming there’s “a lot of upheaval to tackle a problem in the tied sector”.

Another concern is that the new regulations will concentrate power in the hands of the few. And the smaller firms of IFAs will be forced out of the market. Gordon Gilchrist, of 20/20 Consulting, says: “IFAs will have to be part of a network, it’s the only way they’ll manage.”

Consolidation
Most agree that product distributors – namely financial advisers and high street banks – will be the clear winners from deregulation. But some observers fear that far from broadening choice across the industry, depolarisation will shrink the range of choices available to savers.

Experts suggest many advisers will be driven to join networks that have the buying power to increase efficiency and drive down product costs. In fact the trend towards consolidation is already occurring.

“Most of the large IFAs are being bought up by the big companies. I fear that when the dust has settled there will be few really independent financial advisers,” says the Consumers’ Association’s Fritz. A spokeswoman for the FSA, however, assures “there’s a place for smaller IFAs in the market”.

Streamlining operations
The FSA’s decision is also making waves in the larger companies. But most appear positive about the changes.

Friends Provident is making 500 people redundant as a result of its decision to follow rivals by shutting down its door-to-door sales force. Many other life insurance companies have already taken steps to close down their direct sales forces, the best known of which was Prudential.

Friends Provident has been gradually reducing its direct sales force, which used to employ up to 900 people. The insurer said in the future it expected to sell its financial products through self-employed appointed representatives and IFAs.

Simon Clamp, Director of UK Distribution at Friends Provident, says: “We closed the direct employed sales force for two reasons. Firstly it’s a reflection of regulatory changes and secondly because it’s becoming increasingly difficult to make money in this way. The future is moving away from the black and white to distributors that can operate in the inbetween.”

The dilemma for regulators and Government is whether depolarisation will result in higher margins for bigger banks and increased cost for consumers. If that becomes the case then the shake up will have failed in one of its main goals and a rethink will be on the cards.

Michelle Perry is a freelance journalist

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