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Has the FSA really changed its mind?

It appears the FSA may have conceded the case over the defined-payment system and decided to scale back its plans for the reform of polarisation.

Speaking at the industry conference Distribution Strategies Post-Sandler in London recently, FSA head of polarisation review David Severn said the FSA would prefer to drop the authorised financial adviser model.

In Severn&#39s words, the thinking is that if an alternative to the DPS is adopted “which the majority of IFAs, if not all, can deal with, there will be no need for AFA. We only needed it because there were fears the DPS would lead to a desertion from the IFA sector.”

He said the only reason that it was included in CP121 in the first place was because the FSA needed to offer something to advisers who wanted to continue offering financial advice from across the whole market.

Therefore, if a more palatable version of the DPS were on the table which would result in fewer IFAs leaving the sector, there would be no reason for the AFA option to exist.

It is known the FSA has been looking favourably at the alternative payment methods put forward by Aifa and the Sandler review team for some time and Severn confirmed that in his speech at the conference.

He said the FSA is “seriously considering” both options but was willing to listen to anyone else who had thoughts on the subject.

Aifa director general Paul Smee reckons the main advantage that Aifa&#39s menu option has over Sandler&#39s plan is that it will win out in a cost-benefit analysis. He says the cost to providers of changing their systems so they can handle Sandler&#39s various remuneration options should lead the FSA to opt for Aifa&#39s plan.

Smee says: “I think Sandler&#39s proposals would take more working out and more adaptation on the part of providers to comply with them.A major obstacle will be the cost-benefit analysis. I think the menu option will deliver the same thing but it will do it cheaper.”

Sandler&#39s model would operate in a similar way to commission except that product providers would have no say in how much IFAs are paid for giving advice.

The problem as Smee sees it is that such a payment system would require a significant change in how providers&#39 admin operations work.

If what Severn says reflects what the FSA is likely to do then there would be a situation where multi-ties and gap-filling still exist but IFAs would not face the degree of disruption outlined in CP121.

Should IFAs start celebrating the demise of the DPS just yet?

Heartland Independent chief executive Tony Weaver says: “We think it is fantastic news. This now gives us clear direction as to how companies will operate in a depolarised world. I have said all along we need to look at where the industry is heading. I think we now have a better idea as to how things will operate.”

But they may want to leave the champagne on ice for a while. They should remember David Severn has made public statements in the past which appeared to reflect FSA policy only for the end-result to turn out otherwise.

In October last year, at an FSA open meeting on polarisation, Severn gave a speech where he said the prospect of multi-ties had a “question mark” over it.

He said: “We could go in for an option which saw more adoption of products in the tied sector. A lot of consumers use the tied channel and will continue to use it. There must be a bit of a question mark over multi-ties. Abolition of polarisation makes for good headlines but in practice we would have to replace it with more rules.”

Then along came CP121 in January and multi-ties were firmly on the agenda, polarisation was clearly facing the axe and the industry was left scratching its head over what Severn was on about the previous October.

LIA head of public affairs John Ellis says: “I think we have got to wait and see. We have been through this before last year when David Severn outlined the FSA&#39s thinking and it did not turn out to be the case.”

There are a number of ways of looking at what happened at that meeting. One is that the majority of delegates at the conference misinterpreted Severn&#39s comments and he did not actually mean the future of multi-ties was not looking bright.

Alternatively, Severn may have been speaking on behalf of himself and not the regulator but this seems unlikely, given the fact he heads the polarisation review and it was an FSA-sponsored conference.

The third option is that what Severn said did reflect the regulator&#39s line at the time but things changed between October and January.

Ellis says: “In October, Severn probably genuinely thought he was putting forward options that would be debated internally. He is doing his best but other players are involved as well.”

It could then be just as likely that the FSA may change its line between now and the end of the year when it is expected to issue draft rules on the future of polarisation.

After more than three years since the Office of Fair Trading controversially recommended that polarisation should be reviewed, the end-result for IFAs if Aifa&#39s menu system is selected, could be just that they have to give their clients the choice between fees and commission.

Yes, there may still be significant reform in that multi-ties will be created and some IFAs may choose to go down that route, a relaxation of what tied agents and direct sales forces can do and the scrapping of the better than best rule.

Kangley Financial Planning managing director Geoff Kangley says: “If the whole point of the exercise was to put polarisation under the spotlight and look at how it can be made better and the solution they have come up with is that consumers must be given the option of paying fees then I would have reservations about the amount of money spent. Many IFAs already operate on a menu-based system by offering their clients the choice as to how they pay for advice.”

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