The disappearance of polarisation as a result of CP166 will have come as little surprise to anyone who has followed the debate for the last three-and-a-half years.
A bigger shock is the extent to which the regulations have been relaxed and new types of advising activities permitted. The fact that the FSA has opted for this level of liberalisation has been met with raised eyebrows throughout the industry.
Aegon business development manager Steven Cameron says: “The FSA did say it wanted to deregulate and it certainly has done so. What it is proposing is probably more than what most people would have expected.”
The proposals contained in CP166, published last week, amount to the biggest shake-up in UK financial distribution since the current system was born in 1988. It will see almost a complete stripping away of the rules governing what advisers and firms can do in terms of giving advice to consumers.
Hybrid firms will be allowed to move between being tied, multi-tied or independent. They can tie themselves to a panel of providers of indeterminate size which can be changed at random. There is no obligation for this panel to be the best available in any particular product area and advisers can choose to recommend a product from outside the panel if they believe the situation warrants it.
LIA head of public affairs John Ellis says: “It appears to be a situation where anything goes. There is the potential for immense consumer confusion about what different providers and advisers can offer. The average consumer will probably just take what they are offered and not go elsewhere because they will not understand the differences.”
The FSA's solution to help consumers understand what type of advice they are getting and the status of their adviser is an initial disclosure document setting out this information. But some industry commentators point out that many consumers do not read documents of this type.
Syndaxi Financial Planning principal Robert Reid says: “We have a regulator which seems to be recommending what in reality will be an unregulated market, if you agree with the situation that the status disclosure it is proposing will not work.”
Aifa director general Paul Smee says: “I think the FSA is putting a lot of emphasis on the initial disclosure document.”
Throughout the whole polarisation review dating back to 1999, the FSA argued that its intention was not to damage the IFA sector. With the publication of CP166, it could be argued that it has achieved just that – massive reform for the tied sector but comparatively little change for IFAs unless they themselves choose to embrace it.
Standard Life managing director of UK sales Feilim Mackle says: “We are pleased the value of independent advice has been recognised. IFAs currently play a unique role in promoting saving and investment within the UK and in creating a competitive marketplace for product providers.”
One of the changes receiving the most focus in CP166 is the replacement of the better than best rule. The scrapping of the rule came as no surprise but what was not known until last week was what was going to take its place.
IFAs will have to notify clients up front of provider holdings in their firm of more than 5 per cent. They must also tell clients if they recommend a product from one of their backers. Furthermore, firms must inform the FSA if they place more than 20 per cent of their business with any one provider and, perhaps most interesting, providers cannot place any kind of sales targets on firms they invest in.
The general reaction in the industry has been that the measures are proportionate. Kangley Financial Planning managing director Geoff Kangley says: “As long as the adviser can justify the basis of his advice, it is largely irrelevant who has invested in their firm.”
In such a liberalised regime, some are asking why anything such as white-labelling or appointed representatives having more than one principal continue to be banned.
Timothy James & Company investment adviser Rob Guy says: “Banks will be much less likely to sign deals with smaller fund managers because their brand name is less recognisable to consumers.”
But Barclays says it has no concerns about the white-labelling ban. Spokesman Andrew McDougall says: “We want to use people's brand names that are well respected by our customers. From, our point of view we want to use brand names that people know and trust.”
That this new regime offers change on a level not seen since the Financial Services Act 1986 is not under dispute. But IFAs can breathe a sigh of relief that they have for the most part escaped the obligation to introduce serious reform to their business practices.