To understand fully the implications of the new regime, it is important to understand how polarisation first came about, why it is now being done away with and how the depolarised world will work.
Polarisation was introduced by SIB in 1987 with the intention of reducing perceived abuses prevalent at the time. In 1999, the director general of fair trading examined the polarisation rules and concluded that these were significantly anti-competitive. The FSA then began a phased review with the aim of reforming the regime.
The first stage of depolarisation began in January 2001 followed by more detailed proposals in January 2003, which considered the removal of the polarisation restrictions themselves. February 2004 saw the publication of CP04/3, which included details of the new disclosure arrangements, the so-called menu.
It is these proposals which form the basis of the new advice regime.
Depolarisation is a liberalising measure. Firms which are operating as independent, whole-of-market advisers or as single-tied agents will be free to carry on doing this if they so choose.
It will also become possible for firms to offer a selection of packaged products from a limited range of product providers, creating the multi-tied adviser.
This reform should increase competition, maximising the choice available to consumers and exerting downward pressure on prices.
The new rules take a radical approach under which firms will be free to sell whatever selection of products from whichever product providers they want.
Firms can even offer different selections or ranges of products to different customers (provided firms have the appropriate systems and controls in place). So far as payment is concerned, firms may charge fees or take commission or do both.
The only qualification is that firms which hold themselves out as being independent must offer their customers advice across the whole of the market and enable them to pay by fee.
It is important to realise that these benefits will only be forthcoming if consumers understand the options available to them in the depolarised market.
In order to ensure that customers are able to make informed decisions, depolarisation is being accompanied by the introduction of two new key facts documents – key facts about our services (known to the industry as the initial disclosure document) and key facts about the cost of our services (known to the industry as the menu).
Firms will be required to supply these to their customers at the start of the sales or advice process.
The key facts documents are concise, standardised documents, whose form is prescribed by the FSA. They have been the subject of detailed consumer research and developed to ensure that they are easy to understand.
Firms are not only required to hand out these documents at the start of the sales process but they must also make copies of key facts about our services available to any potential customer who requests it. This will enable consumers to shop around between firms and negotiate their price with individual firms and help them get the best deal available in the depolarised market.
The depolarisation rules are being implemented over a six-month transitional period. During this time, firms could either continue to be regulated under the present rules or notify the FSA that they want to adopt the new rules.
If they chose the latter option, they will have to be able to comply with all the new rules, including the requirement to provide customers with the key facts documents. At the end of the sixmonth period on June 1, 2005, all firms would need to be compliant with the new rules and the depolarisation pro-cess will be complete.
It is important to note that when the insurance mediation directive comes into force on January 14, 2005, all advisers will have to provide potential clients with key facts about our services.
The FSA is providing a variety of information to the industry on the implications of the new rules as well as a series of industry workshops. We have produced a depolarisation factsheet aimed at IFAs and there is an IFA guide available on the FSA website summarising the changes.
Brenda Gibson is manager (polarisation and advice) at the FSA