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Briefing Note BN013/05
5 December 2005

On 1 December last year the Financial Services Authority (FSA) made new rules abolishing the polarisation restrictions that previously applied to firms providing advice to private customers on packaged products. The regulator has had a number of questions from firms about how the new regime will affect our rules and guidance on inducements.

FSA rules prohibit firms from giving or receiving an inducement where this is likely to be of detriment to customers. This rule has not been altered by the depolarisation rules, although the FSA has supplemented it with new or amended guidance.

Case Study of Improper Practice

An adviser firm offered customers a multi-tied range of products from two provider firms A and B, but A gave the adviser an inducement, so that it would always recommend its products in preference to those of B. This would clearly be unacceptable.

The adviser firm would be breaching its duty to recommend the most suitable product in its range when B offered a superior product, and it would also be misleading customers by saying it was multi-tied, whilst in practice acting as if it were single-tied.

To comply with rules under depolarisation, the FSA expects payments made by providers to advisers should generally take the form of either commission on product sales, which will be disclosed on the menu, or loans or investment on commercial terms, which will be disclosed on the Initial Disclosure Document - assuming it is more than 10% of the adviser's total capital. However, so long as these conditions are met, the regulator will not be rigid about how it applies its rules.

The FSA's inducement provisions are not intended to stop investment happening, but to make sure that it takes place in a way that is open and transparent to consumers. They are not an optional extra, but an essential part of the depolarisation regime.

Relevant Guidance

Depolarisation: COB 4.3.3 R; COB 5.1.6 A R.

Inducements: COB 2.2.3 R; COB 2.2.5 E; COB 2.2.5 AE; COB 2.2.6 G; COB 2.2.7 G.

Commission Disclosure: COB 4 Annex 6 R; COB 4 Annex 7 R; COB 5.7.5 R.