FSA says fundamental change to polarisation will benefit consumers and the industry

In a two-stage approach, restrictions will be eased firstly on stakeholder pensions, CAT-standard ISAs and direct offer advertisements, including fund supermarkets. Experience gained in these areas will then inform a second, and more wide ranging, review of polarisation affecting other products.

The staged approach recognises the case for change but also ensures that this takes place in an orderly manner to avoid the risk of confusion among consumers and that reform goes hand-in-hand with greater product and status disclosure.

FSA Chairman, Howard Davies said:

Vigorous competition is likely to be the best route to a fair deal for consumers of financial services, just as it is in other markets. We agree with the OFT that the current polarisation rules dampen and distort competition. So we plan to consult on changes to the regime which will liberalise the distribution of financial products. At the same time, we will enhance the disclosure rules so that consumers understanding of the role of advisers and salespeople and the products they sell, keeps pace with market changes.

Stakeholder pensions, CAT-standard ISAs and fund supermarkets

The FSA proposes to consult on liberalisation for:

• stakeholder pensions and CAT-standard ISAs, which will serve to broaden the availability of products having in-built minimum standards to protect consumers; and
• direct offer advertisements, including fund supermarkets, which offer consumers wide choice.

In practice these changes would mean that consumers should have more access and choice when purchasing a stakeholder pension or CAT-standard ISAs. Those who buy financial products direct should also have greater choice.

The FSA aims to consult on rule changes in these areas later this year.

Wider Liberalisation

Around mid-2001, the FSA will consult on more fundamental changes to polarisation. The review will cover a range of options from complete abolition to more limited options such as gap-filling. In addition improvements to the disclosure regime will be developed in parallel.

Detailed Background

The FSA has examined polarisation in the context of its statutory objectives, in particular consumer protection and consumer awareness. It is not concerned solely with the competition aspects of polarisation.

The FSA has taken account of the previous regulators justification for polarisation when it was introduced in 1988 - i.e. on consumer protection grounds, despite its potential to distort competition. The most important issue for the FSA has been whether there is a case for maintaining polarisation unchanged on consumer protection grounds. It has concluded that there is not for the following reasons:

i) the regulatory environment has changed substantially since polarisation was introduced. Regulators have introduced a range of measures including status disclosure, commission disclosure, and a training and competence regime;

ii) the FSA has further measures in hand to improve transparency and disclosure. Plans for the publication of comparative information next year are well advanced. A discussion document setting out how product information disclosure might be improved, so as to allow consumers to make better informed decisions, will be published soon. Work is in hand to improve status disclosure further to deal with the absence of polarisation.

iii) consumer detriment arises not only from the purchase of inappropriate products but also through the failure to make appropriate financial provision. Improved access and choice allied to better disclosure will serve consumer interests better.

iv) the UK is unique in imposing a structural constraint on distribution arrangements and other countries have not found it necessary to introduce a system like polarisation to protect consumers. In the future, the current polarisation regime could become increasingly inconsistent with EU developments

v) an important role remains for genuinely independent advice to consumers and the FSA believes it will be possible to maintain a robust and healthy IFA sector whilst also trying to improve competition within the tied sector.

Notes for editors

1. Current polarisation definition: Polarisation is a set of rules made by the regulatory authority about the way some savings and investments can be sold. Advisers on life assurance, personal pensions and unit trusts either have to be independent and advise across all products and companies on the market, or they have to represent just one company and sell only its products. Advisers cannot currently do both.

2. The rules came into effect in 1988 and apply to life policies, pension policies and collective investment schemes and investment trust savings schemes whether held in a PEP, ISA or otherwise

3. The Treasury agreed it should receive advice from the FSA following the report it received from the Director General of Fair Trading (DGFT) under the 1986 Financial Services Act (1986 FS Act) which found that the polarisation rules of the Self Regulatory Organisations (which oblige those advising on life assurance, personal pensions and unit trusts to be either independent or tied to advising only on the products of a single provider) were significantly anti-competitive. The advice is contained in a letter from the chairman, Howard Davies, to the Chancellor of the Exchequer, the Rt. Hon Gordon Brown MP, published today (copy attached).

4. In August 1999 the DGFT made a report under section 122 of the 1986 FS Act to the Treasury which concluded that the polarisation rules of the SROs (primarily PIA and IMRO) restrict or distort competition to a significant extent by preventing some innovation in retail markets. However, the DGFT expressed the view, under his Fair Trading Act responsibilities, that, in the case of life assurance and personal pensions, these effects are outweighed by the protection that the rules give to consumers of these products. This was not the case, however, for other packaged investment products, (effectively unit trusts). In consequence, he recommended that all collective investment schemes e.g. unit trusts be released from the polarisation rules. Under the provisions of the 1986 FS Act a decision on the DGFTs report rests with Treasury Ministers.

5. The FSA Board decided in 1999 that the FSA should commission an independent study of polarisation which has been welcomed as an important input to decisions by Treasury Ministers. The study, by London Economics (LE), was published by the FSA on 5 July 2000 with an invitation to interested parties to comment on it before the FSA gave its advice to the Treasury.

6. LE looked at five main options:

   Option 1 effectively end the polarisation regime by allowing a third category of multi-tied advisers;

   Option 2 release unit trusts from the polarisation rules as recommended by the DGFT;

   Option 3 release from the polarisation rules those products where there are government set minimum standards (stakeholder pensions and CAT marked ISAs);

   Option 4 retain polarisation but allow gap-filling in providers product ranges. Gap filling means that where a company, for example, produces its own life assurance and stakeholder pension contracts but does not have any unit trusts it could fill that gap in its range by acting as the distributor of another companys unit trusts;

   Option 5 retain polarisation unchanged.

7. LEs broad conclusions were that the polarisation rules appear to have some anti-competitive effects, largely because competition is blunted in the tied channel. They concluded, therefore, that some relaxation of the rules would bring economic benefits, particularly for consumers using the tied channel. LE also confirmed that the current rules had reduced consumer detriment by clarifying the status of advisers in the eyes of the public and advocated countervailing measures to deal with this if the rules were changed.

Appended information

The advice is contained in a letter from the chairman, Howard Davies, to the Chancellor of the Exchequer, the Rt. Hon Gordon Brown MP. The direct URL is http://www.fsa.gov.uk/pubs/press/2000/135_letter.pdf.