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Regime is past its sell-by date

It is a truism that the only constant is change. The challenge for financial advisers, product providers and regulators alike is how to adapt to change and how to shape it where that makes sense.

The debate on polarisation must be seen in this context.

Since polarisation was established in 1988, a great deal has changed and it would be odd if these changes were ignored by all the parties to the market, including those responsible for the regulation of financial advice and competition.

Not least of these changes has been the rapidly growing impact of information technology and the Government&#39s steps – through Cat-standard products and now stakeholder pensions – to see the growing potential for greater productivity translated into a better deal for consumers.

In that respect, it must be recognised that, in some countries, most notably in the US, distribution costs in financial services are often lower than in the UK.

More streamlined and direct means of selling play their part in this greater efficiency. The question for the UK authorities, financial advisers and product providers is whether these conditions and wider consumer choice across the whole market can be encouraged here.

The approach announced last week signals that we think this is possible for the medium term. Polarisation in its present form has outlived the conditions that justified it as an intrusion into the market structure.

The key, as we consult on what will be some quite radical options for liberalisation, will be to increase competition and choice while improving consumer understanding of the status of different kinds of advice.

It is perhaps worth recording here that initial comment on the Chan cellor&#39s announcement has been quite balanced and open-minded. The industry, consumer groups and commentators appear willing to engage in the dialogue we are establishing and this is encouraging. We plan to consult shortly on behalf of the PIA and the FSA on the proposals for early change on gap-filling for Catmarked Isas and stakeholder pensions, together with steps to cement the arrangements for direct-offer fund supermarkets.

In all these areas, the balance of consumer advantage is clear. From where I sit, there is nothing in any of this to say that changing the polarisation regime will result in the interests of any one constituency, for example, financial advisers, suffering to advance the interests of others. Undoubtedly, there will be an important continuing role for genuinely independent advice.

It will be evident to anyone who has read it that the London Economics report dev oted considerable thought to how changes to the polarisation regime could be made without damaging independent advice.

Ministers have repeatedly stated their view that truly independent advice is a valuable service to consumers. It follows that, in the periods of consultation ahead, one of the goals will be to maintain conditions in which consumers are aware of independent advice and choose it where it meets their needs.

As ever, the challenge for IFAs is to add yet more value to the service they provide and convince a growing number of consumers of the value of independent advice.

On consumer understanding of status, there seems little disagreement that polarisation was necessary to deal with a substantial lack of transparency in the market conditions of the 1980s.

Since then, while a substantial minor ity of consumers remain unclear, there have been successive improvements in product and status disclosure which attack the transparency problem in other ways. The development of disclosure has been continuous and the FSA will publish a discussion paper shortly on product disclosure. A central plank of our work going forward will be development of appropriate status disclosure measures, including better consumer awareness.

Competition considerations seem to have caused the greatest confusion in the minds of many commentators. Yet, investor protection and competition policy serve the same master – the consumer interest. They are not alternatives.

The Financial Services and Markets Act 2000 explicitly recognises this linkage by giving the FSA statutory responsibility to improve competition in financial services in addition to the specific investor protection responsibility in the previous regime.

There is no reason why industry interests should find any intrinsic difficulty with this new responsibility. Parliament&#39s aim through the new legislation is to give consumers wider choice, increase their confidence in markets and thus set a background for growing volumes of business. Under those conditions, adviser productivity can increase, with lower earnings on each sale more than offset by more sales.

So, we have the opportunity to promote an outcome where both consumers and the industry can profit from change. Consumers would make better provision and get better value for money. The Government would see its goals for pensions and other benefits better achieved. Advisers and product providers would sell more products and acquire a better reputation in the process.

That is the kind of change agenda to which we can all respond.


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