Polarisation: the FSA takes cautious steps to liberalise the regime

In its consultation paper 80 (CP80), the FSA proposed that the polarisation regime, which currently obliges advisers on life assurance, personal pensions and unit trusts either to be independent or to advise on the products of only one company (tied advice), should be liberalised in three ways:

• to permit firms to adopt stakeholder pensions (SHPs) manufactured by other providers and to sell these through the firms representatives;

• similarly, to permit firms to adopt CAT standard ISAs manufactured by other providers; and

• to remove direct offer financial promotions from the polarisation regime.

The aim of these proposals was to increase access and choice for those consumers using tied advisers.

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

We received mixed views on our proposals, ranging from those who dont think we are going far enough to those who are opposed to what we are suggesting. Weve listened carefully to everyones views and the FSA Board has decided to maintain its cautious approach in this first stage of changes to the polarisation regime. The changes we have announced are not intended to pre-judge the wider review of polarisation on which the FSA will be seeking views later this year.

Notes for editors

Changes announced today
1. 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.
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 concept of polarisation will be modified from 29 March 2001 as a result of the announcement today.

   Provider firm with direct sales

   A provider firm, whether or not it has its own stakeholder pension, may formally arrange to sell the stakeholder pensions of as many other firms as it judges appropriate. For the purposes of the rules these products will be known as "adopted packaged products". Where a provider firm arranges to sell an adopted packaged product it is responsible for the advice given on all the sales irrespective of the firm whose product it sells. The firm whose product has been sold is responsible for the product terms and the administration connected with servicing its policyholder. Employees in the sales force may not sell the products of any other provider than those chosen by their employer and will offer adopted packaged products alongside the other products in the employer's range.

   Provider firm with appointed representative (AR)

   ARs cannot contract directly with more than one product provider firm. ARs may sell all the products, including the adopted packaged products, of the provider firm to whom they are contracted.

   Direct offer advertising

   All authorised firms may now use direct offer advertising methods to distribute the packaged products of one or more providers. Under the rules of the previous regulators it is possible for firms to issue advertisements which provide information but no advice. For example, some advertisements may identify and promote a specific investment without the provision of key features and an application form. When a consumer responds to the advertisement they should be sent a "fulfilment pack" allowing them to complete the purchase. Alternatively, an advertisement may provide key features and an application form permitting "selling off the page". In both cases the liberalisation of the polarisation rules allow such advertisements to feature the products of more than one provider firm. It would be necessary in both cases to ensure that the totality of the advertisement made clear that no advice was being given and a suitable warning would be required, as is currently the case, telling consumers unsure about suitability that they should seek advice and where to get it.

4. On 29 March, the FSA will be publishing its Policy Statement Polarisation: Feedback to CP 80 and the rules giving effect to its decisions. The rules will be accompanied by PIA, IMRO and SFA guidance, explaining how the FSA rules affect the obligations of firms regulated by the SROs.

   Background

5. In August 1999 the Director General of Fair Trading (DGFT) made a report, under section 122 of the 1986 Financial Services Act (1986 FS Act), to the Treasury which concluded that the polarisation rules of the Self Regulatory Organisations (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.

6. Under the provisions of the 1986 FS Act a decision on the DGFTs report rests with Treasury Ministers. The Treasury agreed it should receive advice from the FSA following the DGFT report.

7. The FSA Board decided in 1999 that the FSA should commission an independent study of polarisation which was 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.

8. 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.

9. The FSA advised the Government that polarisation should be ultimately subject to fundamental change to allow consumers greater choice and to facilitate greater innovation by the financial services industry. The advice was contained in a letter from the FSA chairman, Howard Davies, to the Chancellor of the Exchequer, the Rt. Hon Gordon Brown MP, which was published 8th November 2000. The advice was accepted by the Government.

10. The FSA published Consultation Paper 80, Reforming Polarisation: First Steps, in January 2001 which set out a two-stage approach to modernising the polarisation regime. The first stage, which was limited to consideration of the regime as it affects products conforming to minimum standards and direct offer financial promotion, has resulted in the liberalisation of polarisation announced today.