A review of the rules governing polarisation has now moved one step closer to conclusion as Financia...
A review of the rules governing polarisation has now moved one step closer to conclusion as Financial Services Authority (FSA) consultants prepare to deliver their recommendations this month.
The FSA will then take industry views on the report and make a final recommendation. It is still unsure whether these recommendations will be made to the Government under the terms of the Financial Services Act or, because we are in an interim period between statutes, to the Competition Commission.
The Office of Fair Trading (OFT) made its recommendations on polarisation to the Government at the end of last year. If adopted, its proposals would drastically change the IFA industry. The group recommended that polarisation rules relating to investment advice on unit trusts and Oeics be scrapped but felt that advice on life and pensions products should remain.
This would pave the way for IFA businesses to introduce multi-ties to product providers for non-life products. The reasoning behind the OFT's recommendations being that polarisation rules, even if they provide consumer protection, distort competition in the market by stifling retail product innovation, such as multi-ties.
Paul Smee, director general at the Association of Independent Financial Advisers (AIFA) has an opposing opinion to the OFT's recommendations as expressed here in a question and answer session with Investment Week.
What will come of this latest report on polarisation?
I think something awfully good ought to come out of this latest report. What we (AIFA) think ought to come out of the report is no change.
AIFA has reached this decision for the following reasons:
1) The present system seems to be working. There is growing evidence that people understand the difference between tied and independent advice and indeed growing evidence that people have a preference for independent advisers. Independent advisers now account for over 50% of the market in selling these products, showing there has been great growth in independent advice as a channel.
2) The number of complaints that go to the Ombudsman concerning independent advisers are only 15% of his workload. So over 50% of the volume of the market accounts for 15% of the problems. Now that is pretty good. It is justification the system the IFA has developed over the past years is giving the sort of services which investors want. I would have thought that was a plus and a reason for not changing it.
So you would disagree with the recommendations from the OFT regarding polarisation?
The report from the OFT did not really explain why they wanted to create a rather complicated situation.
Think about these things from the point of view of the investor.
In future what would happen if the OFT recommendations were taken, (and there is no evidence they will be), halfway through the interview having started by saying I am an independent adviser and I do all this, the client says: 'Oh incidentally I want also to reinvest my Isas. At that point, if the OFT recommendations were accepted, the adviser has to say, 'Can we stop for a moment because I must explain something to you: I know I told you I'm independent but actually when it comes to Isas I'm not. I am actually selling the products of the following companies. What is the investor going to feel? I think a) confused and b) I suspect let down. It is going to reduce confidence in the industry.
What about the argument then that polarisation distorts competition in the market?
I think the reason it was put in was because it was looked at from the perspective of the direct sales force.
Some people wouldn't go to a direct salesperson because they couldn't offer them a comprehensive product across the market because the provider doesn't have them.
There is nothing forcing product providers to cover the whole market. If people want to cover the whole market there is a very readily accessible channel for them to use. I think it is wrong to say it is anti-competitive simply because certain providers have decided voluntarily as it were to restrict their product range.
Are investors confused between commission and fee-based advice?
We believe, and I think that a lot of people in the market believe, the investor should have a choice.
They should be asked how they want to pay the adviser. People don't actually believe advisers are free, and a lot of people will, if offered the choice, say well actually I would rather it came out of commission than an actual fee. But there should be that choice offered. There should be that discussion.
Should it be possible to negotiate a rebate as well?
Well, most advisors will do that for the clients. They can do that as part of the above discussion. I certainly don't think you can mandate a particular form of remuneration for a particular service.
So this is the feeling of the IFAs you have been dealing with?
Yes, it certainly is. I haven't found an IFA who is not totally into polarisation.
What will happen if the Government does take on board the OFT recommendations?
I think two things will happen. One thing will be cost. I think people always underestimate the cost of change.
If you change distribution patterns actually there will be a cost involved and it could be quite a heavy cost.
That has to be taken on board, which is very important. I think people assume you wake up one morning and it is a brave new world and everyone is feeling excited but there will be costs of change.
There will also, I suspect, be a lot of providers who will try desperately to get hold of market share. They will try to get contracts with particularly good IFAs and I don't think that is a healthy environment for investors.
What happens now?
We have to wait to find out what the report is going to say. We will then have an opportunity to comment on i
Janus Henderson Global Dividend Index
More than 10 million shares allocated
Long-term strategic holding
What made financial headlines over the weekend?
To promote 'long-term investment'