Plans to kickstart stakeholder sales by allowing multi-ties have hit a legal stumbling block, stopping fund managers and life offices from tying.
The news could hit smaller providers wanting to import a bigger provider's stakeholder but does not affect banks.
City lawyers say they warned the FSA the Insurance Companies Act 1982 and the Financial Services Act 1986 outlaw providers from selling the products of others.
Companies can bypass the legislation if they own a shell company not related to insurance or unit trusts.
CMS Cameron McKenna partner Simon Morris says the restrictions have been carried forward in the new Financial Services and Markets Act.
Lovells partner John Young says UK legislation must adhere to a 20-year-old European directive which prevents the Government from simply scrapping the provision. He says: “For an insurance company to be selling other companies' products would be illegal.”
Morris says: “Life insurance companies and unit trust providers cannot distribute third-party products. Each of these restrictions is carried forward in the new legislation.”
An FSA spokeswoman says: “This is something that has been considered in the consultation paper and, while it may create problems for some firms, they will not be insurmountable.”