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Full circle

Five or six years go, I attended an Aifa dinner where the main speaker was Sir Howard Davies, then chairman of the FSA.

Sir Howard tells wonderful jokes. I still recall the roars of laughter from assembled IFAs even as he told them that the regulator would be announcing in the next few hours the implementation of the FSA’s CP121 document and the end of polarisation.

Equally amusing, although perhaps only with hindsight, was his reassurance to dinner guests that once the latest bout of regulatory reviews were concluded – and at that time we had Sandler and stakeholder products, CP121, CP146 on mortgages, the Green Paper on pensions, training and competence, status disclosure and many more – IFAs would be able to enjoy a relatively settled regulatory regime, at least for a few years.

As we now know, Sir Howard was being just slightly optimistic in his assumption.

Ironically, last week’s RDR interim report neatly brought it all full circle as it fundamentally envisaged a U-turn to the “good old days” of polarisation all over again.

In effect, almost a decade after the point in 1999 when the Office of Fair Trading found that polarisation “significantly restricted or distorted competition by restricting innovation in retail models”, we are almost back where we started.

Back then, the OFT believed polarisation “affected competition between product providers by increasing barriers to entry and dampening competition between products sold through tied advisers”.

The regulator and the OFT both published surveys purportedly “proving” that consumers were confused by the then polarised regime. Today, the FSA tells us a different story. It wants a three-tiered system – generic money guidance, sales and genuine whole-of-market advice which alone would be allowed to call itself “independent”.

Nine years ago, polarisation was detrimental to consumers. Today, the RDR interim review tells us: “We think that the simpler landscape has the potential to deliver greater clarity for consumers and could lead to a material increase in the levels of consumer confidence in the advice sector, meaning many more consumers meet their savings needs.”

As it happens, I broadly agree. That said, I wonder how the RDR’s analysis tallies with the legal advice given by the OFT in 1999 – and accepted by the Treasury at the time – that polarisation was anti-competitive.

There remains a serious unresolved issue as to how consumers can get genuine advice from current salespeople. Until now, financial advice given by salespeople may have been linked to a product sale but it was still useful for those unable to afford an IFA’s services. The interim report accepts that there will be an overlapping layer of people who have used salespeople for the kind of advice it envisages would now be given only by an IFA. But it has no answers to this conundrum.

Another area of concern is over what qualifications will define the professionalism of IFAs. Interestingly, the interim report backs away from its original insis-tence on much higher quali-fications being a precondition for independent status. It now says it is prepared to accept the diploma in financial planning at level four. This, according to the Chartered Insurance Institute, is equivalent to the first year of a degree course. It isn’t but even if it were, we have a situation where accountants and solicitors are required to have a degree and sit post-graduate exams. Meanwhile, self-styled IFA “professionals” can make do with a first-year university exam – which, as every undergraduate knows, is simply a repeat of A-levels.

But probably my biggest concern is what happens in respect of IFA remuneration. The original RDR last year spoke in terms of an end to commission and the introduction instead of factory-gate pricing. Initially at least, the talk was of completely divorcing products from any commission payments, including trail. Then we were told the RDR did not want to be too prescriptive and we ended up with customer agreed remuneration, which everyone knows is really commission by another name.

Last year, Aifa director general Chris Cummings was right to point out that what the old RDR was trying to do was define IFAs in terms of how they were paid and not the kind of advice they gave and whether it was whole of market or otherwise.

Today, however, the interim report has backed away even from CAR. What we get instead is a plea: “We want providers to meet their responsibilities to design, target and market their products in ways that treat their customers fairly – and this includes the ways in which they remunerate both their in-house staff and third-party distributors.”

The FSA tells us that after publishing the RDR last June, it received almost 900 written submissions.

It clearly needed to listen and some major U-turns were necessary. But it strikes me that, along with its massive unexpected volte-face over polarisation, the FSA has collapsed back into the arms of the industry. Only time will tell whether consumers really benefit. Somehow, I doubt it.

Nic Cicutti can be contacted at


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