The Association of Friendly Societies claims polarisation has marginalised its products and welcomes proposals for gap filling in the LE report.
It is now 12 years since the Government introduced the concept of polarisation as a way of ensuring that financ-ial services customers knew what they were getting and from whom.
It seemed so straightforward – customers would use tied advisers and know they had only their sponsor's products to sell or independent advisers who could access the whole gamut of appropriate products to find the right one.
At this point, the law of unintended consequences took a hand.
In practice, most customers did not go out to choose a tied or an independent adviser, they used whatever sort of adviser emerged from the process of selection – independent if they rang IFAP or tied if they spoke to their bank manager.
Today's independent adviser might be tomorrow's tied agent selling a totally different and restricted range of products following a change of ownership.
A regime designed to assist consumers proved much less consumer-friendly by restricting choice and barring access to the market for a number of providers.
This is what happened to friendly societies. For historical reasons, they have a limited product range but there are a couple of products which the law reserves to friendly societies and no other pro-vider. Twelve years ago, these products – tax-exempt savings and the Holloway combined sickness benefit and long-term savings plan – were commonly sold through other financial services providers and advisers. Polarisation put paid to this overnight.
Tied agents would invariably link up with a provider offering a wider if incomplete range of products. But even for independent advisers, such small products with a maximum investment governed by legislation were less appealing than other products.
The result of this was very unfortunate. Consumers were no longer able to choose certain specialist products.
Hit particularly badly were children's savings schemes. These long-term schemes are usually intended to mature at a point in a young person's life when an injection of cash would be extremely welcome – buying the first car, going to college, starting a job – and generations of young people have lost out as a result. So much so, in fact, that politicians have begun to seek ways of supplying young people with a “dowry” at that age out of public funds.
Yet such a dowry could equally well come from saving relatively small amounts over time through a tax-free friendly society plan, which would be both cheaper and more cost-effective.
Polarisation has created a very uneven playing field. It has favoured large operators with a wide range of products at the expense of small players with specialist ranges. It has encouraged cherry-picking by focusing on large-scale investment and high-net-worth clients at the expense of small investments and those of more modest means.
To that extent, it has contributed to the increase in financial exclusion which worries the Government so much at the moment. It has brought about an environment in which the small and specialist tend to be selected against, no matter how valuable and socially important the product.
Polarisation was never intended to be anti-competitive and to reduce consumer choice. When the Office of Fair Trading decided in 1998 that the time was ripe for a 10-year review of the polarisation regime, followed more recently by a further study commissioned by the FSA, the Association of Friendly Societies was delighted.
We feel this is the moment to undo some of polarisation's unintended consequences while still ensuring that the essential of consumer protection is maintained and, if anything, strengthened by clari-fying the lines of responsibility for the products sold.
Adopting the proposal for the redefinition of polarisation which has emerged from the study commissioned from London Economics will do much to solve the problems we have seen in the last 10 years without introducing new unintended consequences. It will make it easier to fill gaps by selling specialist products which are not included in the range of major providers. It will make it clear where the responsibility for problem solving lies and it will also be clear whose product it is.
Is there a downside? We do not think so. We believe it can only be good for consumers to have wider choice and a more comprehensive range including specialist products. They will continue to understand who they are buying from and what the implications are.
That redefinition will help friendly societies sell products which are unavailable from other providers as part of the broadening of consumer choice which we feel is well overdue. That it will enable societies to reach their traditional markets more easily among those whom the industry as a whole has ceased to serve is an added advantage.
The study gives good reasons why IFAs should not fear this development but should see it as an opportunity to do more and better business and offer better value to clients.
For friendly societies, the development is especially well timed. The Financial Services and Markets Act has repea-led earlier legislation which shackled them to a short, outdated list of products and required them to amend the law before they could undertake new and innovative business. The product range will change and some interesting things are on the way.
Redefining polarisation would reopen selling channels long closed to them so that they can bring these new developments more easily to the market.
At the same time, changes in state provision increasingly mean that mutual organisations are relied upon to fill gaps with flexible, member-orientated products.
All this is good news for friendly societies but better still for consumers at all financial levels and for their advisers.