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Aussie Rules

Anyone considering how the proposals in CP121 could affect the UK&#39s financial services market should look to Australia. Having scrapped polarisation in the early 1990s, it already has 10 years&#39 experience of a distribution structure similar to that put forward by the FSA in CP121.

Up until the 1980s, advice was not regarded as particularly important in Australia and financial services products were mainly delivered through tied salesforces. This changed in the 1980s.

One of the most significant developments was the arrival of financial planning businesses, where clients could get advice on all aspects of their finances and buy products from a wide range of different product providers.

In the early 1990s, as a result of regulatory changes such as the introduction of compulsory pension contributions, polarisation was scrapped in the advice market.

Under the new regime, advisers could choose whether to be tied agents or members of multitied dealerships where they recommended the products of more than one provider.

Given that the financial advice market was already mainly customer-driven, a significant number of advisers chose the dealership route. Today, of the 18,000 financial advisers in Australia, around half regard themselves as independent dealerships.

In fact, the growth of master trusts and wrap accounts has allowed manufacturers such as Axa to own majority positions in distributors but still allow the distributor to be independent in the marketplace.

As rules about the ownership of financial adviser firms relaxed, many of the life insurance companies acquired dealerships to ensure a bigger market share. This trend has already started in the UK.

However, in Australia, although this approach has been generally successful, it has not always paid off. In the first few years, many advisers were keen to demonstrate their independence and their new owners sometimes found their products being deselected.

Adapting to this culture change has taken time for both the advisers and providers. Indeed, in the last few years, some institutions have sold their interest in these businesses back to the advisers. In other cases, the relationship between adviser and provider is working well.

Because providers can own adviser firms, both wholly or partly, a variety of different company structures have developed. The big players, mainly owned by financial institutions, dominate the market. Alongside these, there are a big number of smaller companies, ranging from one-man operations to medium-sized firms, which tend to be independent.

However, whatever the structure or ownership of an adviser firm, this has no bearing on how it is treated or expected to operate with regard to regulation.

Further change is anticipated with the introduction of the Financial Services Reform Bill in March. Its key objectives are to create a harmonised licensing, disclosure and conduct framework for all financial services providers, create consistent guidelines for product disclosure and introduce a streamlined regulatory regime for financial markets and clearing and settlement facilities.

In doing so, it aims to make the industry more transparent for consumers and also give them more protection when buying products. The industry should also benefit by harmonising the frameworks of the former regulators as there should be lower compliance costs. It is also hoped that the bill will enable Australia to export its financial services products to Asia.

Under the bill, which closely resembles elements of the UK&#39s regulatory model, advisers have to disclose their fees and their relationship with any product provider. They are also required to have knowledge of their client and to provide advice based on a reasonable amount of research similar to the UK fact-find.

The bill also means full disclosure on all financial products and funds, whether in terms of charges or commission. This is certain to put further pressure on profit margins and it will ultimately mean the value in the market moving to the advice end of the value chain. Providing the best financial planning advice will become the key to the success of the insurance companies.

This has already been seen in the way the market has developed since the 1980s, with the real winners being those companies that embraced financial planning, whether by buying an advice firm that fitted with their strategy and culture, building strong relationships with the independent market or by converting tied agents to financial planners.

The premium that good financial advice represents in Australia is sure to provide reassurance for the UK financial services market. The two markets are already very similar and, with the UK moving closer still with the scrapping of polarisation, it is encouraging to see the opportunities for both financial advisers and product providers that the new depolarisation regime will present.

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