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The positive potential

An end to polarisation now looks all but inevitable. The industry had been anticipating the FSA&#39s proposals and the details last week should have surprised few.

The FSA&#39s consultation document certainly means a fundamental change for product providers and IFAs alike.

But if a change to the existing regime is rubberstamped, the future should not be viewed in a negative light. Although the proposals are presented in a consultation paper, we believe they will be implemented and that there are positive options across the IFA sector.

We now need to work with IFAs to understand the proposals better and the opportunities that they will present.

The FSA has asked for comments but full-scale opposition is missing the point. The current regime has been in place since 1988 and under review for the past two years.

With a massive amount of work undertaken, many had predicted the demise of polarisation. The FSA is stepping up its consumer education programme and insists that the public is ready to benefit from a new environment.

Never before have financial services and advice been so high on the Government action plan. Its commitment to increased public take-up of financial products is unquestionable. All IFAs should derive considerable comfort from this.

The key issue right now for IFAs is to ensure their market share is maintained and reinforce the central message that advice is crucial. These proposals do not change that.

We believe the size of the market will be largely unaffected and that IFAs will be able to adapt their business to any of the new models with less difficulty than may first appear. The outcome is therefore positive with increased choice for IFAs – to remain IFA or move to distributor or tied. Indeed, the options are not exclusive and we expect hybrids (part-independent, part-distributor) to form a significant segment of the new marketplace.

The proposals offer real opportunities for manufacturers and distributors to make cost savings, increase efficiency and create more innovative advice propositions. The industry is arguably better at managing change than almost any other.

The proposals will certainly provide a boost to IFAs who have already chosen a fee-based approach. This segment is likely to view the proposed changes as a positive endorsement of their strategy and this change should differentiate their proposition to the market.

But some IFAs may be put off by likely consumer reaction to explicit disclosure of fees and may want to continue with commission rather than introduce the defined-payment system. This will be possible by becoming a distributor firm.

Putting distribution agreements in place with all current providers would enable these firms to continue to conduct business as they do now – except for the loss of the right to call themselves “independent” which, although historically emotive, will have much less substance in the new regime. This group would still have potential to access the whole market in theory.

In practice, distributors are likely to put agreements in place to ensure renewal commission is protected but use a smaller set of providers for future new business. We believe the distributor company route presents a more attractive proposition to IFAs than a straightforward tie has done previously.

Provider companies with a multi-dimensional capability are likely to be in a position to support any of the proposed intermediary options.

If multi-ties are introduced, it will bring the UK into line with many countries in the European Union and with the US and Australia. In the last 18 months, we have used our sister companies in those countries to research the way in which the multi-tie model works. This experience is likely to be of value now in the UK market.

We already have the infrastructure, expertise and experience of running an independent, tied agency and direct salesforce model so we are geared up to operate under this framework and we will look to use this experience to develop a distinctive proposition in the UK market.

Since the rules around stakeholder pensions were relaxed in March 2001 we have been offering stakeholder to business partners as a “gap-filling” product so we are well placed to help in this simplification process. We believe the proposals present banks with new options to re-engineer their manufacturing and distribution structures. This is potentially an area for significant change.

The root of the FSA&#39s proposals lies in the belief that access to financial services can be improved, ultimately to reduce the so-called £27bn savings gap – the amount of national shortfall needed to be made up to ensure an adequate retirement.

With the market set to become more competitive, IFAs are better placed than ever to sell themselves on the basis of service, value and transparency, whichever opt-ion they choose.

The combination of better information and sharper competition, both of which should follow from the abolition of polarisation, can do more to ensure that the consumer gets the right products at the right price.

IFAs should be able to adapt to the new regime. They all now face the same strategic options – IFA, distributor, tied and hybrids. However, differentiation will come through implementation, so a partnership which helps to execute effectively will be the key.

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