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9 December 2013
The depolarisation debate is vital to retail financial services. It looks set to alter radically how financial services are offered and consumed. It is a revolution of regulation, unsurpassed in recent history.
Solicitors are aware that such a sea change may have a big impact on their own businesses, but will also create significant opportunities, which begs the questions: what is polarisation and what are the consequences of its abolition?
It is simply the segregation of advice offered in the retail financial services industry into two types. The two 'poles' are tied advisers and independent financial advisers (IFAs). Tied advisers can advise only on the products offered by the company they are affiliated to; IFAs must choose from the full range of products offered in the market (within their regulation remit).
The Financial Services Authority (FSA) wants this system abolished. The main reason given by chairman Howard Davies is that it puts "shackles on competition and innovation". He continues: "The regime we inherited now represents a major market distortion and has simply not delivered sufficient consumer benefits to justify maintaining it." The FSA is concerned that it does not give low or medium-income earners sufficient access to financial advice. Also, where advisers currently receive a commission, the FSA feels this creates bias in favour of commission-paying products, preventing clients from receiving best advice. The FSA's solution has been outlined in its Consultation Paper, designated CP121.
CP121 proposes repolarising retail financial advice into advisory groups. IFAs can still use the 'independent' moniker by operating under a 'defined payment system', which would mean charging fees. Considering the majority of IFAs operate on a commission-only basis, such a change would be fundamental to the way the fees would need to be administered.
Those who felt unable to charge fees could operate as authorised financial advisers (AFAs), working as normal but without the advantage of having 'independent' in their title.
Advisers without the technical knowledge to operate as AFAs may well operate as multi-tied advisers, meaning they would be able to advise on products offered by a restricted number of product providers (usually around five), and could offer best advice within the remit of products available to them.
Finally, a number of banks and insurers will still operate their direct sales forces of tied advisers (or bancassurers in banks), selling only the products that those companies offer.
Depolarisation brings into focus the nature of the relationships between solicitors and IFAs and with whom solicitors should link. A defined payment structure is more akin to solicitors' charging systems, indicating that those retaining independent status may be best positioned to work with solicitors. Indeed, the Law Society has already indicated that it would be prepared to work with IFAs under the new system.
Nevertheless, there are suggestions that the FSA is loosening its definition of defined payment, adding to the confusion. Also, there is a lack of clarity as to which advisers will be AFAs, with the potential that direct and multi-tied advisers could be lumped under the AFA title, all being considered 'distributors'. Considering that there are already good solicitor-IFA relationships, who would become authorised in the new regime? This presents further confusion for solicitors, compounded further by indications that the oft-touted option of joint ventures will be subject to closer FSA examination; not to mention the cost-ineffective compliance burden of FSA regulation.
Change also affects numerous areas of an adviser's business, presenting new opportunities for solicitors to advise financial services clients. It is an important time to be looking at retail financial services. If the FSA, so single-minded in its approach, achieves the pipe-dream of financial advice for everyone, the industry will become a behemoth.
Furthermore, the FSA's inference that consumers should have an affinity with advisory brands rather than product brands, combined with wholesale industry consolidation, means that the financial services brands of the 21st century could be advisory, not product led. And for solicitors prepared to look to the industry, such a sea change should provide opportunities aplenty.