FSA proposes widening customer product choice

Polarisation regulations currently prevent tied advisers from recommending products from other companies. Under the FSAs proposals these restrictions would be lifted for the sale of stakeholder pensions, CAT standard ISAs and direct offer financial promotions offering products without advice directly to consumers.

This would mean that, for example, a consumer looking to buy a stakeholder pension or CAT standard ISA through a high street bank could be offered not only the banks own products but also those of other, unconnected, product providers.

The firm giving the advice to the client will remain responsible at all times for any advice given at the time of sale, regardless of which companys product has been recommended.

For those consumers who like to do their own research and do not want financial advice, the rules are being relaxed for direct offer financial promotions, where no advice is given (for example some newspaper advertisements and Internet sites). Firms will be free to market the investment products of different companies through this distribution channel.

The rules consultation launched today is the first step on a programme announced by the FSA, with HM Treasurys backing, in November 2000. This followed a 1999 report from the Director General of Fair Trading, which concluded that the polarisation regime restricts, distorts or prevents competition to a significant extent by preventing innovation in retail markets.

The proposed rule changes would mean that tied sales forces and appointed representatives of product provider firms would be free to market stakeholder pensions and CAT standard ISAs from as many other companies as the product provider firm wishes. It would also be possible to package together the product of one provider with a choice of investment funds from another.

The second step in FSAs programme reviewing polarisation will be a consultation, later this year, on options for more radical change for the longer term.

David Severn, Head of Investment Business (Policy) at the FSA said,

"This is the first stage of our consultation on securing a better deal for consumers through improving the working of the market. Buyers of stakeholder pensions, CAT standard ISAs and investment products bought direct will be the first to benefit."

The aim is to bring the changes into effect in time for the start of stakeholder pension contributions in April 2001.

Notes for editors

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. Advisers cannot currently do both.

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

3. The decision to change the rules arises from a finding of the Director General of Fair Trading that the current rules of the Self Regulatory Organisations (SROs) were anti-competitive. The Treasury agreed it should receive advice from the FSA following the DGFT's report. This was given in a letter from Howard Davies to the Chancellor of the Exchequer in November 2000 (see FSA/PN/135/2000). The main thrust of the advice was that changes to the polarisation regime, subject to full consultation, should allow consumers greater choice and facilitate greater innovation by the financial services industry.

4. This consultation paper contains two sets of rules changes; one to the forthcoming rules and guidance in the FSA handbook coming into effect at N2, the other to the SRO rules by means of designated rules made by the FSA (effectively acting as the former SIB under the current legislation) to deal with the period up to N2. Both PIA and IMRO boards have agreed to be joined in this consultation.

5. Proposed changes to the rules are:

   Provider firm with direct sales force

   The firm, whether or not it has its own CAT standard ISA or stakeholder pension, may arrange to sell those of as many other firms as it judges appropriate. It is responsible for the advice given on all 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 around servicing its policyholder. Employees in the sales force may not sell the products of any other provider than those chosen by their employer and must offer all the products the employer has chosen to sell.

   Provider firm with appointed representative (AR)

   ARs cannot contract directly with more than one product provider firm. ARs may sell all the products of the provider firm to whom they are contracted has arranged to sell. Of course, most provider firms with a direct sales force will also have ARs.

   Direct offer advertising

   Under the rules of the previous regulators the advertisements known as category B and category C advertisements, which provide information but no advice, would need to be changed. Category B deals with advertisements that identify and promote a specific investment without the provision of key features and an application form. These must be sent off so that the consumer receives a "fulfilment pack" allowing them to complete the purchase. Category C advertisements provide key features and an application form permitting "selling off the page". In both cases the relaxation would 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 suitability warning would be required, as is currently the case, telling consumers unsure about suitability that they should seek advice and where to get it. These changes to SRO rules would follow through to the direct offer financial promotion rules in the FSA Conduct of Business Sourcebook.

6. The closing date for comments on the consultation paper is 16 February 2001. This is an unusually short period because of the advantages of introducing new rules in time for the start of stakeholder pensions. The principles behind the proposals have been known since November.

7. The FSA will publish guidance through a PIA regulatory update and IMRO reporter explaining to firms how the FSA designated rules changes affect the SRO rule books and what is expected of them.

8. The consultation paper is available from the FSA website: www.fsa.gov.uk/pubs/cp/80

9. 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 protection of consumers; and fighting financial crime.

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

Appended information

This Consultation paper is available from the publications section of our web site. The direct URL is http://www.fsa.gov.uk/Pages/Library/Policy/CP/2001/80.shtml.