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Depolar bears

It has been two years since the FSA doomed polarisation and now the industry finally knows just what what the future holds.

But as depolarisation day dawned last week with the publication of
the final rules on December 1, it became apparent that the main
protagonist to end the polarisation regime was already having doubts
over the new set-up.

One of the biggest surprises in the final rules was the revelation
that the Office of Fair Trading is concerned that the effects of
depolarisation could be anti-competitive.

Its response to CP04/3 points to the potential for the final rules to
have an anti-competitive effect where there is the potential for
firms to use the market-average commission to co-ordinate pricing or
commission payments.

The OFT has signalled its intent to review the final rules to ensure
they do not inadvertently grant exemption from the Competition Act

The OFT’s comments have struck a chord with an industry concerned
about the changes being imposed upon it. Paul Smee, who has just left
as Aifa director general, says Aifa has consistently warned the FSA
that depolarisation could have an anti-competitive effect, and LIA
head of public affairs John Ellis agrees, saying the trouble with
publishing a market average is that it can easily be seen as a norm.

But Waters points out that the reason for depolarisation is because
the OFT described polarisation as anti-competitive and is adamant
that the OFT is much happier with the new and “significantly
liberalised” regime.

However, he says the FSA will be closely monitoring the use of the
market average. He says: “We will be looking at commission levels
and the structure of the market, at how many advisers will be
remaining IFAs and if multitie is taking off.”

He does not expect polarisation to have an anti-competitive effect
but the FSA will be reviewing the market, possibly within the next
two years.

It is setting a number of baseline measures which it says it will
assess the market and is collecting data to help determine whether
firms are offering a wider choice of competitively priced products
suitable to meet the needs of consumers, whether consumers are better
informed, whether the quality of advice has changed and whether the
nature of competition has changed.

CP04/27 states: “One area warranting particular attention will be
the overall nature of competition in light of the implementation of
the menu as a means of disclosing the cost of advice.”

Now the industry knows the guidelines for depolarisation but what
shape is the market going to take?Most IFAs are adamant they will
hold on to their independence. A survey by the FSA of 40 medium-sized
firms and 40 small firms found all of them intend to stay independent.

A few of the medium-sized firms say they plan to operate a multi-tie
as a separate business, possibly with ex-direct salesforce members as

FSA director of retail policy Dan Waters says the response of firms
over depolarisation has been pretty positive so far, “even from the
IFA community”.

He says: “People are telling us that the rules do not present them
with any incentive to walk away from their independent status, which
we are pleased about as we have been very careful about this.

“The independent advice brand is very strong in the UK and we really
feel that it is worth something.”

But the FSA’s research found that 60 per cent of banks are planning
to gap-fill through multi-tying once this becomes an option.

Waters expects to see banks and some product providers offering a
wider range of products through multi-ties. He says the offerings on
the high street are limited and the possibility of multi-tying to
increase them would create competition. He does not expect “a mass
defection” from the independent sector but say the FSA will be
monitoring changes carefully to see how the market structure alters.

Barclays Financial Planning managing director Jim Reeve believes that
in a short time there will be a shift from the tied sector and the
IFA sector into select choice propositions or multi-ties.

He says: “We are putting together a select choice proposition for
our customers, specifically tailored to what we believe their
requirements will be.”

Reeve says he is sure that Barclays will be offering an IFA
proposition in 2005 but “beyond that we will have to see how it pans
out. It is interesting to see how some think that the market is going
to shift away from the IFA. I think there will still be a segment of
the market which wants independent advice but it is going to be
significantly smaller than it currently is.”

With the first multi-tie offering from an intermediary expected in
January from Thinc, it remains to be seen how depolarisation and
opportunities to multi-tie will affect the IFA sector.

Waters believes that IFAs should feel confident as they face their
future as “the FSA has worked hard to make sure that we do not
undermine the independent sector”.


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