The FSA's proposals for depolarisation have been met with the predictable welcoming reaction as the industry puts a brave face on what is basically a mess. But there is more than a hint of resignation about some of the comments.
Depolarisation was never a good idea and was only considered as a sop to the bancassurers which made it plain that depolarisation was the price they would extract for selling stakeholder pensions over the counter in bank branches.
Most providers of financial services realise this but they also realise that trying to reverse the depolarisation tide is a hopeless task.
But, given how unsuccessful almost everyone has been in selling stakeholder pensions to anyone, the FSA could afford to ignore depolarisation and let the status quo remain. That would be too sensible and so we have to go down a route which at best is confusing and at worst is downright misleading.
The FSA maintains that the consumer will have a much clearer idea of how much financial advice is really costing. This may be true but if the upshot is that even fewer people take advice, then the new regime will be a failure and there is every possibility that this is precisely what will happen.
Announcing the menu proposals, FSA head of retail projects David Severn said: “Many consumers remain reluctant to pay up-front fees for financial advice. If consumers want their adviser to take commission, that is their choice. We want consumers to be clear about the amount of commission being paid so they can have confidence that the financial advice they get is not being influenced by the level of commission.”
What will happen is that consumers will be put off buying a product at all because they have no idea what is reasonable commission and what is not and when they see how much commission is being paid, they will be so horrified, in some instances, that they will simply walk away without purchasing.
If the end result is a reduction in the level of commission and hourly fees, then this will be a good thing but the most likely outcome is that consumers will not understand the true cost of giving advice and will refuse to buy.
Education about the true cost of advice is clearly a good thing but the reality is that it is uneconomic to give advice to small investors and many will be deterred from seeking advice if one of the first things they get is a booklet called, A Guide to the Cost of Our Services, as the FSA suggests.
Polarisation is by no means perfect but multi-ties, which will become the norm, will definitely be even more confusing for the average investor. Consumers have only relatively recently become used to the notion that an intermediary is either a salesperson selling the products of one provider or a truly independent financial adviser who is able to advise on the whole range of products on offer.
It will appear to the uninitiated that the cost of advice from a multi-tied agent is cheaper than from an IFA but it is unlikely that the consumer will appreciate the true nature and limitations of multi-ties. The way forward should be to require all IFAs to charge fees, as is the case with all other professions, and leave the existing distinctions between IFAs and salespeople in place.
Sadly this is not going to happen. But in the end, the menu approach does IFAs no favours as it will make them appear to be expensive compared with multi-tied bancassurers, without highlighting the infinitely superior service offered by IFAs.
IFA Promotion came out with the brave reaction from David Elms: “These proposed changes will make not only the price but also the value of advice clear and comparable across all advice channels. This will drive healthy competition in the advice markets and, most importantly, enable people to make informed choices about who they take their financial advice from and how the pay for it.
“For the first time, people will be able to compare up front the cost of advice on a restricted range of products versus the cost of independent advice across the whole product market.”
But the reality is that most consumers will not realise they are being given restricted advice and will go for the cheaper option. Why do the regulators keep trying to reinvent the wheel? Polarisation is one of the few bits of the Financial Services Act which is worth keeping and they have to meddle.