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FSA defends its research for CP121

Q: What will happen to the existing renewal/fund-based commission income streams under the proposed new regime?

A: We deal with the point at paragraph 4.36 of the consultation paper where we make it clear that it is not our intention to prohibit those firms which move to defined-payment remuneration and, as such, are permitted to call themselves “independent”, from receiving a flow of renewal commission arising from business formerly transacted on commission terms. However, renewal commission payable on future business would have to be accounted for under the defined-payment agreement.

Anonymous

Q: Please explain how the proposals in CP121 benefit the buying public by removing polarisation. Polarisation makes a clear distinction between a company&#39s agent and a client&#39s agent and surely the solution to is to educate the buying public better, rather than blurring the issue?

In the days before the FSA, there were plenty of multi-tied agents who purported to be brokers to the buying public. This will happen again and the buying public will be hoodwinked into believing that they are getting a choice from a full range of products. They are not likely to understand that the product recommended may only be selected from a few companies – and there is a strong likelihood that this will drive commission up as companies vie with each other for market share.

This will make products (a) more expensive and (b) uneconomic for some companies. Either way, the consumer&#39s choice will be reduced so how can this be a benefit?

A: Actually polarisation does not make a clear distinction between the agent of a product provider and the agent of the consumer. When an IFA sells a packaged product,a complicated web of agencies is created between the IFA, client and product provider which the regulatory regime has to cut through.

But regulation has not changed the fact that when the IFA acts as the agent of the consumer he is paid by the product provider. Consumers do not find this satisfactory and believe commission bias exists. Hence our proposals.

Q: How can the proposals in CP121 be implemented when they go against the recommendations of the OFT and others? This is obviously a sop to banks and insurance companies for taking on unprofitable stakeholder pensions. This means that the Government controls the FSA rather than the FSA being accountable to the Government doesn&#39t it?

A: We discussed at some length in CP121 how our proposals for change fit in with the Director General of Fair Trading&#39s August 1999 report to the Chancellor of the Exchequer commenting on the effect on competition of the polarisation rules.

While the DGFT report concluded that polarisation was anti-competitive, the DGFT nevertheless explained the view under his Fair Trading Act 1973 responsibilities that the consumer protection benefits arising from polarisation outweighed his concerns about competition as far as the sale of life insurance and personal pensions were concerned.

Accordingly, polarisation should be retained for these products. This recommendation, which did not command wide support, was officially withdrawn in due course by the DGFT. We consider that the other points made by the DGFT have also been adequately and appropriately addressed in the text of the CP at paragraphs 4.80-4.90.

Q: In statistical terms, the sample used by the three research agencies is pathetically small – so small as to be considered unrepresentative of the buying public as a whole. How can you attempt to implement these proposals based on such an inconclusive sample? This is hardly democracy at work, is it?

A: Quantitative research

Sample surveys are carried out to support many areas of decision-making, including Government programmes all over the world, and have a significant impact on the allocation of many billions of pounds of resources.

Sampling and statistical theory which underpins this work does not depend on the proportion of the total population that is included in any one survey. This is a common misconception. Rather, the properties of a representative sample allows one to measure the level of error around the estimates produced from the survey.

The number of people (and the sampling approach and fieldwork design) included in the NOP survey all-owed us to produce confidence intervals which were sufficiently robust to support the conclusions.

Increasing the sample size does not have an exponential effect and, therefore, if,for example, one increased the sample we used by, say, 20,000 interviewees, the imp-act on the standard error would not lead us to draw different conclusions.

Qualitative research

The qualitative research used as part of the polarisation report used both in-depth interviews and group-based activities. This approach does not aim to produce statistical outcomes but rather to understand the underlying reasons behind individuals&#39 behaviour and attitudes.

Qualitative work is used in a wide body of work, including many (probably most) large-scale financial firms and also in public policy development. The numbers included in this sample (which were stratified to reflect different elements of the market and the demographics of the consumer population) are of a sufficient size (and commensurate with other similar types of studies) to allow us to explore the range of consumers&#39 views in connection with this subject.

Q: These are not proposals for consultation, are they? Isn&#39t it the case that once the consultation period is over, the FSA will simply implement CP121 – with perhaps a few insignificant changes intended to make us believe that comments have been taken on board? This is a done deal, I am certain – and what is more, wasn&#39t the deal done well before the launch of stakeholder?

A: The Financial Services and Markets Act 2000 lays down the procedures that must be followed by the FSA if it proposes to change any of its rules. These procedures include obligations to consult on proposed changes, have regard to any representations received in response to the consultation and in due course to publish a response to them. These statutory procedures ensure that the FSA&#39s rule-making processes are open to public scrutiny and accountability throughout. The next step in this case will be to produce rules for further consultation.

Alan Arlington

Bolton Colby Chartered Accountants,Staines, Middlesex

Q: There have been IFAs who have said that a non-commission business model will not work for them and will elect for multi-tie and would want to change their name to authorised adviser rather than independent adviser. To stop the inevitable consumer confusion, will you be taking the necessary steps to ensure that only independent advisers will be able to use the word “adviser” and that representatives of financial companies are clearly labelled as “salesmen”?

A: Under the existing polarised regime, we use the term “adviser” within the rules to cover collectively the two types of sales intermediary that are currently permitted:

“Representative”, an individual appointed by and tied to a provider firm or by an appointed representative to give advice on investments

“Financial adviser”, an individual appointed by an independent intermediary or by its appointed representative to give advice on investments.

If distributor firms are introduced in due course, it will be necessary to introduce a third type of sales intermediary that will have to be appropriately named. We are mindful of the need to ensure as far as is practicable through a consumer education programme and enhanced status disclosure that consumers are aware of the three types of adviser available and of the different and distinct service available from each of them.

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