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2002 in the review Mirror

For once this year, the FSA finally hit the right note with IFAs and many product providers when it scrapped its plan for a defined-payment system unveiled earlier in the year in CP121 in favour of a menu-based system.

The turn-round which came in November over how the independent sector will be remunerated followed a lobbying campaign spearheaded by Aifa, which Scottish Life head of communications Alasdair Buchanan describes as “a burst of common sense”.

The change of heart somewhat softened the blow that was felt by IFAs when FSA chairman Howard Davies confirmed that the polarisation regime will be axed to bring in multi-ties and gap-filling.

Aifa director general Paul Smee says: “The highlight of the year was getting the FSA to accept the menu system.”

IFA Promotion chief executive David Elms echoes this view, saying: “IFAP played a pivotal role along with Aifa in ensuring the IFA sector is made more robust. The menu system ensures that IFAs will be able to continue to receive an income stream through commission. A starting point was IFAP research revealing that 90 per cent of people are not willing to pay a fee.”

Scottish Equitable manager of business development Steven Cameron says: “The willingness of the FSA to listen to the industry and go for the menu system rather than DPS was the high point of this year.”

The FSA is ready to pat itself on the back, with spokesman Rob McIvor saying: “Our decision not to go ahead with defined payment provides evidence that we do listen to people during consultation.”

But not everyone is quite so ready to jump up and down in self-congratulation over the menu system, with IFA Syndaxi Financial Planning principal Robert Reid warning that the details must be studied and that the industry “has only seen the tip of the iceberg”.

Berkeley Berry Birch deputy chief executive Stephen Ingledew says the menu is insignificant in comparison with the real change – the end of polarisation – which he believes has freed the industry and put it on the road to change.

He predicts more acquisition activity next year as providers continue to snap up distribution while new entrants from overseas, such as National Australia Bank, join the buying spree.

Since the scrapping of polarisation and the end for the better than best rules became near certain this year, providers have got out their chequebooks to buy up IFAs.

In June, Money Marketing reported “the dash for distribution moved into top gear this week” as Aegon UK, Friends Provident, Norwich Union, Scottish Widows and Skandia paid £2.4m each for shares in Millfield.

In the same month, Aegon UK took a 50 per cent stake in retirement specialist IFA Wentworth Rose and in August it bought London-based Advisory & Brokerage Services outright.

At this point, Aegon UK group chief executive David Henderson said: “I am looking to have a portfolio of about 10 IFA firms with expertise in pensions by the end of the year. I expect them to remain independent – the Aegon style is very decentralised.”

In August, it bought national corporate IFA Momentum for an undisclosed sum, in November, it took a 9.2 per cent worth £1m in national IFA group Lighthouse and a 60 per cent stake in national IFA Positive Solutions with an option to buy the remaining 40 per cent in 2006.

But at the same time as providers shelled out for distribution, they also took the knife out to make sharp cuts in staff levels and slash with-profits bonuses as stockmarkets continued to suffer.

Many IFAs remain upbeat, with Millfield saying rather than lamenting the state of traditional investment markets, good quality IFAs should be trying to build consumer confidence by looking at new types of asset allocation.

Chief executive Paul Tebbutt says: “Clients need confident advisers more in this kind of market. Too many advisers are sitting on their laurels rather than changing with clients and markets.”

The lack of resolution coming out of two of the main reviews of the year by Ron Sandler and Alan Pickering, both published in July, has led to criticism across the industry.

Sofa chairman and IFA Informed Choice managing director Nick Bamford says: “After CP121, IFAs faced the double whammy of Sandler and Pickering. Sandler fundamentally missed the point because one of its biggest problems was shooting at too large a target. It looked at the whole of financial services and the review turned into a damp squib.”

Buchanan says: “Sandler and Pickering have suffered from a lack of Government overview on what needs to be done and there has been tinkering more than fundamental changes.”

Institute of Financial Planning chief executive Nick Cann says: “A lot of providers are falling out of stakeholder as they cannot sustain being in a market where they will not make a profit for 15 or 16 years. Nobody will make Sandler&#39s simple products.”

One of the big bugbears of the year has turned out to be the crisis faced by IFAs struggling to get professional indemnity insurance cover as providers pull out of the market and networks raise costs.

Reid says: “The PI debacle has been allowed to get too far advanced. It has been an imperfect solution for a number of years and this has become obvious now with a lack of creative solutions from the industry and regulator.”

Smee criticises the FSA for making changes that have not gone far enough and Bamford warns that the PI problem will not go away until the FSA stops carrying out retrospective reviews and comes up with a watertight definition of misselling.

The regulator admits there is an issue and it claims to be doing all it can to help IFAs, although it is too early to say how the problem will be resolved.

Next year, it is fair to say that the industry is hoping for a clear direction to come out of the plethora of reviews so it can get on with doing business in a depolarised world.

But for some advisers the change is only beginning as they plan for the introduction of FSA mortgage regulation from 2004.

The FSA is trying to ease some worries, claiming that it will be using its experience with IFAs to devise a balanced and proportionate approach – 2003 will see if these reassuring words translate into action.

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