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Carry on, cowboy?

“It was like the Wild West – everyone was out for themselves. If you had a problem with a broker, all you could do was break his legs.” This is how Scottish Life director of sales Jim Gilchrist remembers life as a financial adviser before the advent of polarisation.

Now that the FSA is recommending the abolition of the polarisation regime, which gave birth to IFAs and has defined the distribution of financial products for the last 13 years, minds are going back to what life was like previously.

Are there any lessons that should be learned from the past before the FSA makes its final decision on the future of financial services distribution?

Given the heavy regulation of recent years, it is difficult to imagine an environment where advisers had a minimum of paperwork and where consumers had no statutory recourse for complaints.

Not that there was no one to oversee the industry. For example, the British Insurance Brokers Association was an attempt to separate conscientious brokers (as financial advisers were generally termed) from the more unscrupulous fray.

Gilchrist recalls: “Registration with them was not too demanding. It was all pretty lax.”

Consultation paper 121, in which the FSA sets out its proposals for life after polarisation, contains a fairly lurid picture of life before the present regime. It details perceived abuses, such as advisers who would pass themselves off as independent when they were not, and the payment of additional commission for writing a certain amount of business.

Provocatively paraphrasing recent comments by Ron Sandler, who is leading the Treasury&#39s investigation into the savings industry, the consultation paper also details “the making of opaque interest-free &#39loans&#39 by product providers to intermediaries” which would not be repaid as long as certain levels of business were maintained.

Towry Law director Clive Scott-Hopkins, who has been at the advisory firm for 40 years, remembers the time as “pretty free and easy”. An abuse prevalent at the time revolved around the fact that commission was based on sums assured rather than, as now, annual premiums.

Others remember a fairly robust set of “indirect benefits”, including gifts and holidays.

Utley & Co principal Kevin Utley, who has been an independent adviser since 1968 and a DBS member since its inception, recalls there were many cowboys around in the industry. He says, while they are now fewer in number, they have not gone – regulation has just made them more sophisticated.

Utley lays the blame squarely at the door of the insurance companies. “They would give an agency to a chimpanzee if it produced the business. They have a lot to answer for,” he says.

The late Professor Jim Gower, the academic who conducted the Government review which gave birth to polarisation, said in words etched on the minds of those around at the time: “It cannot be in the consumer&#39s interest for insurers to compete on the amount of commission they pay.”

The maximum comm-ission agreement, which he favoured, existed in the industry until the early 1990s.

Gilchrist interprets the FSA&#39s proposals for commission to be declared up front as a return to the Gower proposals. He says there would be a de facto commission agreement because, if commission is declared up-front, no one would want to be seen to be offering more.

LIA head of public affairs John Ellis, a Government civil servant at the time, remembers friction in the 1980s between Prime Minister Margaret Thatcher and Trade and Industry Secretary Norman “On your bike” Tebbit. While Tebbit was persuaded of the need to clean up the industry and for the City to no longer rely on the old boy network, Thatcher saw polarisation and regulation as introducing quangos and unnecessary impediments to a free market. Number 10 also voiced strong opposition to mandatory qualifications for advisers, which were only introduced in 1997.

Today&#39s FSA chairman Howard Davies was then on secondment to the Treasury from consultant McKinsey as a special adviser. Interestingly, the present proposals could be interpreted as a return to purist Thatcherite ideas.

In 1987, the OFT&#39s ruling that polarisation was anti-competitive was overruled. But a similar report by the director general of fair trading in 1999 led the Treasury to ask the FSA to conduct the review which culminated in last week&#39s recommendation to scrap polarisation.

The biggest change that polarisation introduced was that IFAs had to be the agent of the consumer rather than the provider. Best advice and fact-finds became obligatory rather than practices reserved for the more scrupulous.

Of course, the 1986 Financial Services Act not only gave birth to the IFA but also to the tied agent. The act also coincided with the housing boom of the late 1980s.

Commentators on the FSA&#39s proposals are predicting a scramble to buy up distribution similar to the one that took place in the late 1980s. At that time, the market was heavily dominated by mortgages and the insurance companies indulged in a mad rush to buy estate agents, primarily so they could sell endowment mortgages.

Gilchrist remembers how lucrative this was for insurance companies and tied estate agents. “They sold shed-loads of them. People forget that over 80 per cent of mortgages were endowment mortgages at that time,” he says.

We all know about the endowment crisis that ensued. In January 2000, the first projection letters went out to consumers warning them that their policies might not be sufficient to pay off their mortgages. Ellis points out that one of the ironies is that financial regulation and polarisation did not prevent the big scandals. While the endowment and Equitable debacles could arguably be attributed to pre-polarisation times, pension misselling cannot.

Different regimes will come and go but Utley says he will carry on doing what he has always done – placing business for working-class clients with the half-dozen companies which he thinks are reputable and competitive and keep on relying on the commission which makes advice poss-ible for his clients. Except that now he will be called a multi-tie, which does not bother him unduly.

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