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IFAs still have the upper hand

The Government does not seem to trust IFAs to del iver stakeholder succ ess.

Could it be that the massive squeeze caused by the slashing of margins to 25 per cent of their previous levels has worried the Govern ment enough for it to attempt to broaden the distribution net for stakeholder as wide as possible? Or is there more to this than meets the eye?

One interpretation of the proposed changes to the pol arisation rules is that they rep resent evidence that the Government has been listening to the industry on the problems that minimum stakeholder standards will cause. But the remedy is not the one called for and its prospects for success are at best questionable.

Let us take a look at the facts. The FSA has advised the Government that polarisation should be subject to fundamen tal change and that con sumer choice and innovation are more important than control of the sales pro cess via a structural constraint on distribution.

The FSA&#39s announcement of its proposals has given the industry some fascinating insights into the way it would like to see the financial services industry develop. For example, the belief is stated that consumer detriment ari ses not only from the purch ase of inappropriate pro ducts but also through the failure to make appropriate financial provision. This is a most welcome statement, for which IFAs and product providers have arg ued strongly for many years.

But there appears to be the view in the FSA and Gov ern ment that polarisation has served its purpose and it is time to move on.

Tempted by the carrot of improved consumer choice, increased competition and, perhaps most tempting of all, making a success of stakeholder pensions, the Govern ment is prepared to take risks with consumer detriment and blurring of adviser status.

Some commentators have been suspicious from the outset of the Treasury&#39s motives for calling for a review of pol ar isation. Many have sugges ted this had far less to do with removing a distortion to competition than with effective policing via multi-ties, with a single institution picking up compliance responsibility.

But multi-ties, if they are ever to happen, are still some way off given the FSA&#39s two-stage approach.

One of the key questions arising from the FSA&#39s propo sals is over just how many powerful distribution houses are keen to break into the stake holder market. Clearly, the banks are one potential source of distribution. Most have captive life and pension companies but a few are likely to be capable of providing cost-effective and profitable stake holder solutions in house.

However, their focus has been more on picking off the low-hanging fruit and providing heavier-margin products to their client base. It is very likely that only those provi ders subject to the competitive rigours of the IFA marketplace will be able to provide the low-cost and completely reengineered solution req uired for stakeholder.

So, we may well see an inc rease in competition emer ging for stakeholder business. How powerful this competition is remains to be seen.

Any new competitors will be faced with some fundamental challenges. The 1 per cent maximum charge repres ents a massive margin squeeze. At the same time, we are pro mised a promotional campaign by the Government setting out the importance of making private pension provision.

So, consumers and emp loyee groups will have a gentle push towards stakeholder but the question remains over just how much pull IFAs and any other distributors will be cap able of within the constraints of a 1 per cent charge.

Ideally, the industry would be granted a transitionary period to move to the stakeholder world. This period has been denied by the Govern ment. In its eagerness to close the triangle of regulation by setting price and product terms – following the regulation of people and process – it seems prepared to take substantial risks with the distribution infrastructure that is essential to make stakeholder a success.

The absence of any transition period has led to commission rates being set at loss-making levels by providers. What is clear though, is that IFAs and providers are going to need to adapt to the new world very quickly indeed. It is well known that the current levels of high up-front commission available on 1 per cent pensions are not sustainable for any length of time or for any point beyond which 1 per cent pensions represent a significant proportion of the industry&#39s new business.

The reason why time is short has nothing to do with the capital base of the industry. It is quite clear that any of the top 20 IFA companies would have ample capital to support the new business strain implied by stakeholder pensions for many years and also to support trading losses on new business for many years.

However, the investment community will see to it that time is short. Investors – or, for mutuals, existing with-profits policyholders – will not tolerate a position where very low rates of return are earned on anything more than a trivial proportion of a company&#39s new business book. So, while commission rates have fallen by a huge amount already, the downward pressure will continue. Downward pressure will also continue on provider costs and the old way of doing business will need to be swept away fast.

So, the changes to polarisation proposed by the FSA are likely to lead to increased competition for existing players. Regardless of whether such competition emerges from the UK or overseas, we would do well to remember that much of what the Gov ernment has proposed for stakeholder pensions has put IFAs at the centre of making it a success.

In particular, the Gov ern ment&#39s reliance on employers and affinity groups to enab le access to good quality stake holder arrangements plays very much to IFAs&#39 stren gths. Also, there is nothing to suggest that any new entrant is likely to find it any easier to solve the sales and marketing challenge.

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