FSA enables wider choice for consumers

In future firms advising on packaged product business will be able to offer their customers a greater choice of product and from as many providers as they wish.

Announcing the decision this evening at the annual dinner of the Association of Independent Financial Advisers, FSA Chairman Howard Davies said:

"The polarisation rule has not delivered the consumer benefits hoped for when it was introduced. We are convinced that a freer market will help consumers more.

In future, consumers will find it easier to shop around for the best product and providers will be free of the anti-competitive constraints that have made it difficult for them to offer consumers that choice."

As a result of the decisions announced today:

• firms currently restricted to selling just one companys products to customers will in future be able to offer their customers more choice;

• firms who wish to continue to hold themselves out as independent can do so provided they both advise from across the market and offer their customers the option to pay by fee;

• abolition of the polarisation regime means that consumers will need to understand the exact nature of the advice being given and the service being offered by the firms with which they are dealing. This will be achieved through a new initial disclosure document;

• the so-called better-than-best rule will be abolished. This rule effectively prevents an independent intermediary firm from recommending a product from any provider which owns 10% or more of the firm. Abolition of the rule will mean that independent firms will be able to attract investment to increase their financial strength. There will be safeguards in place to ensure that such investment does not undermine the independence of a firm; and

• we will continue with the present requirement that appointed representatives must, for investment business purposes, have a single principal. This is to secure clear lines of accountability and responsibility for an appointed representatives advice. However, for those appointed representatives who do no more than introduce customers to an authorised firm we are scrapping the single principal rule.

The FSA will be consulting on draft rules to give effect to its decisions in January. Prior to rules being implemented it will also mount a public awareness campaign to help consumers understand how the changes will affect them.

Notes for editors

1. What is polarisation?

   Polarisation rules came into effect in 1988. These rules were made by the then regulatory authority, the Securities and Investment Board (SIB), and control the way some savings and investments can be sold. Advisers on life assurance, personal pension policies, collective investment schemes (unit trusts and OEICS) and investment trust savings schemes have to be either

   • independent (an IFA) and advise across all products and companies on the market
     or

   • tied and represent just one company and sell only its products.

   In March 2001, two changes were made to the polarisation rules increasing the range of products advisers could sell. Under those changes firms can now adopt stakeholder pensions from other providers and sell these through advisers. Also, all authorised firms may now use direct offer advertising methods to distribute the packaged products of one or more providers.

2. Why has the FSA been reviewing it?

   In August 1999 the Director General of Fair Trading (DGFT) made a report to the Treasury which concluded that the polarisation rules restrict or distort competition to a significant extent by preventing some innovation in retail markets. The decision on the DGFT's report rested with Treasury Ministers. The FSA Board decided in 1999 that the FSA should commission an independent study of polarisation to help inform the Treasury. The study, completed by London Economics, was published by the FSA on 5 July 2000 and broadly concluded that the polarisation rules appear to have some anti-competitive effects in the tied channel. The FSA's statutory objectives require it to have regard to the need to minimise adverse effects on competition from its regulatory activities and to facilitate innovation. First stage changes were made in March 2001 with the FSA undertaking to conduct more wide-ranging consultation and research.

3. As announced last month, the FSA is not proposing to adopt the defined payment system, on which it consulted in CP121, but will instead be developing the so-called Menu approach which emerged during the consultation period. The FSA will publish for consultation draft rules to give effect to the Menu as early as possible in 2003.

4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the appropriate degree of protection of consumers; and fighting financial crime.

5. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.