Key Points At A Glance
This article analyses:
the existing regime and the timetable for reform;
the policy considerations underlying the proposed abolition of polarisation;
the reform proposals in detail.
Polarisation - The FSA's Proposals
Polarisation is the regime which applies to the sale of packaged products. Packaged products are, in broad terms, life assurance, stakeholder pensions, collective investment schemes, investment trust savings schemes and ISAs where life assurance and/or collective investment schemes are components. Polarisation requires advisers to be either independent and to advise on products across the market or to represent one company (or group) and to advise on and sell only its products.
The FSA's proposals for the reform of the polarisation regime have gained considerable momentum in the first quarter of 2002. The FSA's preferred choice is to abolish polarisation and despite adverse reaction from many parts of the independent sector and consumer groups the FSA appears to be proceeding along this route undeterred.
This article summarises the current status of the FSA review of the regime and explains the FSA's approach to reform based on the SFA's consultation paper No 121.
It then goes on to consider the FSA's rationale for reform, as well as the potential benefits and risks of abolishing the polarisation rules.
The Consultation Process
Consultation paper CP80 marked the first stage of the consultation process on the reform of polarisation which ended in March 2001. As a result of CP80, two changes were made to the existing regime:
liberalising the sale of stakeholder pensions; and
removing direct offer financial promotions from the scope of the polarisation rules.
As a result of the initial reforms, product providers were allowed to adopt stakeholder pensions provided by other companies and to sell them through their distribution channels. The rationale behind this change was that for stakeholder pensions, as opposed to other personal pensions, consumers do not rely on as much advice because of the nature of the product. Stakeholder pensions have no transfer penalties, are relatively transparent and have capped charges. The FSA also felt that a provider firm might not itself have a stakeholder pension in its product range and as a result tied agents of provider firms would provide less satisfactory recommendations than those of provider firms with a stakeholder within their range.
In relation to direct offer advertisements, the FSA's view was that firms should be able to use direct offer advertisements to distribute the products of one or more provider. It was felt unfair that independent financial advisers were able to use mail-shots to distribute products of several providers while product providers could not. The condition imposed was that no advice could be given to customers in relation to such products and it should be pointed out to customers that they should obtain independent advice if they were unsure about whether or not the product was suitable.
The second stage of the FSA's review was to determine whether to abolish, modify or keep the polarisation rules. This second stage has involved consultation paper 121 ("CP121") which was issued in January of this year. This summarises the FSA's research, explains the FSA's views on the failings of the existing regime and puts forward the options for change and the reasons for its preferred option of abolition.
The FSA is now considering the responses, and proposes to issue draft rules, together with a policy statement, in the summer. It is envisaged that there will then be a further period of consultation in the autumn but Sir Howard Davies has said he would like to see the review process completed by the beginning of November.
It is worth noting that in relation to the revised rules the FSA is not proposing any transitional period. It does not feel this is necessary provided the FSA is clear about what the changes are and what firms are required to do when they are introduced.
Why Reform Polarisation?
When polarisation was introduced back in 1987, and then again in 1999, the Director General of Fair Trading ("DGFT") decided that the rules were significantly anti-competitive in their effect. The Director General did consider that for life insurance products the rules...