FSA unveils draft rules on de-polarisation

The FSA Boards decision to abolish polarisation was announced on 21 November 2002 following lengthy consultation.

David Severn, Head of Retail Projects at the FSA, said:

"The new regime is aimed at increasing choice for the vast majority of consumers for whom the polarisation regime we inherited has denied such choice. It takes nothing away from those who already have access to independent advice."

"Polarisation has failed to deliver the benefits that were hoped for when it was introduced. Our proposals will most benefit the average consumer whose financial needs do not lead them to consult independent financial advisers but who nonetheless deserve better access to advice on suitable products and greater choice."

CP166 proposes that:

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

• firms which 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 firms must clearly explain to consumers what the scope of advice or service they are offering is. This will be achieved through a new specific initial disclosure document; rules about disclosure in advertising and on stationery, all firmly backed up by a consumer education campaign.

"As part of its campaign the FSA intends to include consumer alerts on the Consumer Help part of our website; use leaflets, press activity and joint campaigns with organisations such as the Citizens Advice Bureau (CABx) and through the Post Office. Firms may be encouraged to send approved literature to consumers explaining the charges that have been made. All of this can also be used to support the introduction of the specific initial disclosure document which, along with certain other FSA required documents, will be recognisable by the Key Facts logo."

• 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 free 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

• FSA 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 it is scrapping the single principal rule.

The FSA believes it important that there be greater transparency for consumers over the cost of advice and it will be consulting separately on measure to achieve this in the spring. The FSA does not propose to implement the removal of the polarisation restrictions until it has also concluded that separate consultation on the cost of advice. This means that removal of the polarisation restrictions is not likely to take effect until late 2003 or early 2004.

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 in October 2002, 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.