scottish life's alasdair buchanan says recent fsa proposals could see the industry return to the extremely murky, dirty days of the 1980s
In stock markets and in the wider world, history tends to repeat itself. There is a risk that this will be the case with the proposed de-polarised financial services regime, leading to a return to the confusion seen in the advice market in the 1960s.
Before 1987 and the introduction of polarisation under the Financial Services Act 1986, there was a lack of clarity about the status of financial advisers.
Those who were tied agents could pass themselves off as independent. Other abuses of the regime, also prevalent at the time, included the payment of extra commission in return for higher levels of business written and the making of interest-free 'loans' by product providers to intermediaries.
These loans, by mutual consent, were never repaid as long as levels of business written through the given intermediary stayed above agreed levels.
It was thought that the introduction of polarisation would tackle these problems of potential conflict of interest and arguably disclosure has cleaned the industry up to a degree.
Alasdair Buchanan, head of communications at Scottish Life, said: 'By the 1980s it was felt that the financial advice market had become extremely muddy and somewhat dirty. Advisers who were tied agents were able to hold agencies with other companies and could pass themselves off as independent and investors would have been unclear about the nature of the advice that they were getting.'
Buchanan said situations arose where the adviser had the ability to recommend products from three providers but the product he ended up pushing most strongly was the one provided by the company he worked for.
Buchanan added: 'The Financial Services Act 1986 needed to provide greater protection to the consumer and the concept of polarisation was introduced which got rid of the grey areas in the middle in the financial advice market.'
However, the FSA's recent proposals seem to see product providers taking stakes in IFA firms as acceptable once again ' arguably a minefield as it is questionable whether a firm which is part owned by one of the companies it does business with can truly be independent. There is certainly a danger of history repeating itself here with firms presenting themselves as independent, being less so in reality.
Buchanan said: 'It is a serious concern that we could go back to the confusion of the 1980s. We have called for polarisation to be strengthened rather than weakened and we want status disclosure to be made much clearer.'
Gary Marshall, managing director at Aberdeen Unit Trust Managers, believes there could be a return to a more fluid multi-tie pattern as IFAs evolve their business models. He said: 'We believe the IFA sector may evolve more towards the multi-tie model or as distributor companies rather than IFAs. The lines were already blurring as the polarisation rules did not foresee the discount brokers and the fund supermarkets.'
Marshall though has concerns over the quality of products that may be offered through multi-ties compared with those recommended by IFAs.
He said: 'It seems that one of the winners will be the big distributors such as the banks. The question is, 'will it be at the expense of the IFA sector or is it going to expand market share for everyone?' Also, will the banks go for the same quality of product selection as the IFA market does? There does not seem to be any control over that and it may end up being purely a price-driven exercise.'
Another key area of contention which continues despite the introduction of polarisation and disclosure is high commission levels. Before 1988, there was no compulsory disclosure of commission terms although the disclosure regime introduced in 1995 made it mandatory. An event which fuelled the push towards greater transparency in the advice market was the Gower Report in 1984.
The report, called Review of Investor Protection, discovered poor competence among direct salesforces (DSF), outlined their sales-driven motivation and uncovered a strong likelihood that DSFs and IFAs were biased by commission and indirect benefits from product providers.
It also warned of the risks of providers increasing commissions to buy business through intermediaries. The Personal Investment Authority looked to address these concerns in later years with the introduction of the compulsory FPC exams for IFAs, product and commission disclosure and direct authorisation of IFAs by the regulator in a bid to weed out the least competent advisers.
However, there is a question mark over whether the commission bias has ever gone away, particularly as with-profits bonds remain a big seller in the IFA market. The upheaval and uncertainty caused by any major reform of the financial services regime are another sign of history repeating itself and a key influence here is the opposition of the Office of Fair Trading to the polarisation regime even before it was introduced.
The proposals which became the current polarisation regime put forward by the then Securities and Investments Board (SIB) and were reviewed by the Office of Fair Trading before they were implemented.
The OFT decided in 1987 that SIB's polarisation rules were anti-competitive in their effect on the market in restricting the choice of products that could be offered by tied agents to those of their own company and favouring IFAs. However, SIB's proposals were waved through by the then Conservative government as they were seen as necessary to protect the interests of the consumer. As part of its responsibilities under the Financial Services Act 1986, the OFT kept the polarisation rules under review and in August 1999 produced a further report.
This stuck to the position of seeing the polarisation rules as anti-competitive although it argued that the rules were probably justified on consumer protection grounds for life assurance products. This report began the momentum towards the consultation on scrapping polarisation that is now being undergone.
However, there is a cost to continual change. Richard Eats, communications director at Threadneedle, said: 'The Government and regulators are tinkering with the financial system in this country at an even faster rate. I just hope that they decide what they are going to do, do it and then leave it alone.
'Fund management groups and product providers are having to alter their business models in line with the changes and it is hard to focus on our customers and their needs when the regulatory, tax and product framework is changing so often.'
Marshall said: 'I think that over the long-run there will be better choice for the consumer but the process of getting there is going to be painful. Revolution often involves a panic until a pattern is established and people work out a new business model, the IFAs are going to be at the mercy of that.'
The death-knell for the IFA sector has been sounded many times and it has shown resilience and an ability to adapt to rapidly changing regulations and competitive environments. These qualities will be sorely tested as again we enter more uncertain times.
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