The FSA launches its study of polarisation

The FSA has commissioned its study as part of a detailed assessment of the effects of the polarisation rules as set out in the PIA Rule Book. It will take into account the recommendations made by Director General of Fair Trading (DGFT) in August 1999 and address options for change, taking into account legislative and market developments over the next few years.

The FSA expects the study to be completed by the summer. It will inform the FSAs advice to the Treasury on the specific recommendations made by the DGFT. Alongside the Treasurys decision on these recommendations, it will also inform the FSAs approach to polarisation in its unified handbook of conduct of business rules applying to firms undertaking investment business.

David Severn, Head of Investment Business Policy at the FSA said:

After a decade it is timely to review polarisation in light of our experience of how well it has performed in practice and, looking forward, whether any changes are needed. The findings from the study will help inform the FSA Boards assessment of the options and the recommendations it will be making to the Treasury.

The study being carried out by London Economics for the FSA and will address five main options:

• maintaining the current system of full polarisation

• the DGFTs recommendations (including those relating to such matters as the selection of product panels being separated from the negotiation of commission)

• no polarisation for any products (i.e. firms could choose to be independent, tied, or multi-tied) but clear disclosure of status and any interest (eg. commission based))

• maintenance of polarisation but subject to more stringent conditions attached to being an independent firm (e.g. fee-based rather than commission-based)

• maintenance of polarisation but with such limited exceptions as may be necessary to deal with special situations (e.g. small friendly societies that wish to distribute more than one product).
  

Notes for editors

1. The polarisation rules were introduced in 1987. They require all firms selling certain investment products (life assurance, pensions, unit trusts and investment trust savings schemes) either to be independent financial advisers acting as agent for the customer or company representative of one company and selling only its products. The purpose of the rules is to protect customers from being misled as to whether or not the advice they are receiving is independent and who is ultimately responsible for giving it.

2. Todays announcement follows publication by the Director-General of Fair Trading of his report The Rules on the Polarisation of Investment Advice in which he recommended certain limited changes to the polarisation arrangements.

3. The report by the Director-General of Fair Trading into the operation of the polarisation rules concluded that they restricted or distorted competition to a significant extent by preventing innovation. He then applied this general conclusion separately to life assurance and personal pensions (where the recommendation was to maintain polarisation) and to other packaged products where there is no long-term commitment (when the real recommendation was to rely on status and product disclosure instead).

4. The Treasury is under a statutory obligation to consider the Director-Generals report and has welcomed the FSAs study.

5. Views and comments from interested parties are welcome, and should be sent to:

   Mrs Patricia Worthington Tel: 020 7066 5088 Investment Business Policy Department Fax: 020 7066 9717 Financial Services Authority e-mail: polarisation@fsa.gov.uk 25 The North Colonnade Canary Wharf London E14 5HS

   It would be helpful if these inputs could be copied to the Treasury. Please copy responses to:

   Mr G Foley Tel: 020 7270 5292 HM Treasury Fax: 020 7451 7544 Room 111/G e-mail: gerard.foley@hm-treasury.gov.uk Parliament Street London, SW1P 3AG

6. Copies of the FSA Briefing Paper on polarisation are available free of charge from the FSA Publications department.

7. London Economics is an independent economic consultancy which specialises in analysing regulatory, policy and business strategy issues. The study will be undertaken by the firm''s Financial Services team which, under the direction of Robert Laslett, examines these issues in retail and wholesale financial markets.