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FSA still fighting for IFAs

IFAs may have thought the Chancellor had enough to worry about in his pre-Budget statement without turning his attentions to the financial services industry.

But after sops to the fuel protesters and pensioners designed to secure New Lab our a second term in office, Gordon Brown turned on IFAs with an altogether less conciliatory course of action in mind.

He confirmed a much moo ted review of polarisation. The surprise was in the way the FSA will approach the review and the last-minute hoops it appears to have jumped through to keep the current status quo for as long as possible.

It really was last-minute stuff. The Treasury took it right to the wire, failing to sanction the FSA&#39s plans until the day of the pre-Budget speech.

But the FSA stood its ground and has succeeded in delaying the debate until after N-Day, when the FSA assumes responsibility for all financial regulation and when the final decision about the industry&#39s future will be passed to the Competition Commission, not the Treasury.

The whole question of polarisation came to the fore when the Office of Fair Trading published a report in Aug ust last year saying the rules on polarisation are signific antly anti-competitive.

The Treasury had a statutory requirement to take note of these findings and review them. It also saw an opportunity to get rid of something it has openly disliked since it came to power.

As one industry source, who did not want to be named, says: “The fact the OFT piped up when it did was very inconvenient. Had it not done so, I do not think anyone would have looked at it for a couple of years.”

But the OFT did and the FSA was lumbered with answering to the Treasury on whether the anti-competitive effect of polarisation was necessary to protect investors knowing the Government wanted the answer that it was not.

The FSA commissioned a report from London Econ omics which looked at the possible outcomes of the OFT&#39s proposals and formulated its advice, after consultation, based on it.

It concluded: “We cannot advise you that polarisation is necessary to protect investors in the long term.”

But it fell short of suggesting its immediate abolition through fear of the chaos it would create in the market.

Another industry source says: “There are two sides to the polarisation debate. The first is about anti-competitive practices, the second is about keeping good order in the market.

The FSA is more worried about keeping good order than the theoretical niceties of competition, which is the opposite way round to the Treasury.”

So, the FSA came up with what industry sources claim is nothing short of a cunning plan to ensure the Treasury had nothing to do with deciding the final fate of IFAs.

It proposed two stages to the reform of polarisation in its letter to the Treasury dated November 1.

It was a situation which clearly irked the Treasury which, in its response to the FSA dated November 8, said it was “naturally disappointed that preparation for a full reform will take some while longer to achieve”.

It urged the FSA to get a move on, saying: “I hope you will take any opportunities to move faster that may open up as the project moves forward.”

But the Treasury had no choice but to concede. The project timetable for reform starts with a consultation on easing restrictions on the sale of stakeholder pensions, Cat-standard Isas and direct-offer advertisements, including fund supermarkets, later this year.

It will basically involve tied providers such as banks being able to offer more than one stakeholder or Isa product and appears to be a foregone conclusion, if the language of the FSA&#39s press release is anything to go by.

The FSA says: “In practice, these changes would mean that consumers should have more access and choice when purchasing a stakeholder pension or Cat-standard Isas. Those who buy financial products direct should also have greater choice.”

However, this is a small concession to a Government which is battling to give credence to its ill thought out attempts to coax people with little money to save. It will be followed by a second stage of consultation around the middle of next year which will look at more wide-ranging changes to the polarisation reg ime in parallel with the work they are doing on disclosure.

The consultation is exp ected to cover everything from complete abolition of polarisation to more limited options such as gap-filling. However, the FSA has confirmed that IFAs will be safe until the second stage of the review has been completed.

Aifa director general Paul Smee says IFAs should be safe even after the review has been completed as the first stage of depolarisation will confirm investor confusion.

Smee says: “It is driven by stakeholder and it is containable while it is only a few products. I think all our campaigning about investor confusion will be demonstrated by this experiment.”

If the noises made by the FSA so far are to be believed, it agrees. In its November 1 letter to the Treasury, the FSA says that, despite the fact that polarisation may constrain competition, at least consumers know where they are and any change would create further confusion.

Indeed, it is the bancas surers which create most confusion in the marketplace, with 31 per cent of consumers believing banks are the best place to get independent advice.

The FSA&#39s letter says: “We believe an important role will remain for genuinely independent advice to consumers. The London Economics report gives comfort that it will still be possible to sustain a robust and healthy IFA sector while at the same time trying to improve competition within the tied sector.”

DBS agrees, citing research from the US where independent and face-to-face advice is growing rather than declining. In 1997, 60 per cent of people buying financial products sought independent advice. In 1997, the figure had jumped to 70 per cent. At the same time, the percentage of people who bought direct dropped from 31 per cent to 24 per cent and the discount brokers&#39 share of the market dropped by 3 per cent to 6 per cent.

In the UK, it is a similar picture. According to Datamonitor figures, IFAs&#39 market share has grown year on year since 1994 when it stood at 38 per cent to 56 per cent in 1999.

It is a market share that IFAs and now the FSA seem keen to protect.


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