It may be over a year since depolarisation came into force but there is debate over the effectiveness of the regime. For some, the effect has hardly been noticeable while others say they are more confused.
What is depolarisation?
It might not seem like it, but depolarisation is something that anyone who enters into a financial services transaction – such as holding money in an individual savings account to undertaking sophisticated inheritance tax planning – should be concerned with. Essentially it gives consumers more choice over the type of financial advice they can get and how they must pay for that advice – through paying fees for the advice, through commission payments or a mixture of both.
How has the way advice is given changed under the new system?
Before depolarisation, there were two types of financial advisers – those who sold the products of one firm, and those who were independent. Now there is also a “third way” – advisers and institutions which sell from a small panel of selected providers. In practice, this “multi-tie” adviser is what’s offered by many banks and building societies on the high street.
What was the thinking behind the launch of depolarisation?
Dan Waters, director of retail policy at the Financial Services Authority (FSA), said at the time of the launch that: “The removal of polarisation restrictions allows market participants to create innovative business models that respond to market challenges and the needs of their customer base.” He said this would foster competition and improve the end proposition for customers. For advisers to be called independent, they had to offer customers the option of paying a fee for advice. By setting out a fee option alongside the commission-based remuneration schemes many firms were offering, the FSA also hoped to create a link between the advice that was given and the cost.
Can you explain the different types of adviser?
■Tied advisers: these advisers recommend one provider’s products and work as appointed representatives of that provider. The firm they are tied to is authorised by the FSA and is responsible for the advice given. This means that if you have a complaint, you take action against the company rather than the adviser. Tied advisers may be employees of the provider or self-employed. You’ll most often find them in banks or building societies or working for insurance companies, on a salary or commission. You’ll pay for the advice through charges on any products you buy.
■Multi-tied: these advisers sell products from a range of providers but not the whole market. Some multi-tied advisers will work for banks, building societies or insurance companies. Others will be self-employed and can be individually authorised by the FSA, and therefore take responsibility for the advice, or work as a representative for a particular firm, so the firm is responsible. You’re likely to pay for the advice through charges on products although they could charge fees.
■Independent: independent financial advisers can recommend from the whole market. In practice, many IFAs draw up shortlists of the products they think are the best. Under depolarisation, an adviser using the term independent must offer the choice of paying for advice by fees, commission or a combination of the two.
How would a customer know whether to pay a fee or commission? Is it easy to tell which way is cheaper?
Not really. Fees might be charged on an hourly basis, or a percentage of portfolio value, or some other approach. You would have to ask your adviser for an estimate of how much you might pay for advice on a particular issue and compare that with the commission he would earn from selling you a product. A “menu”, which must be provided by your adviser, will show how their charges stack up against industry benchmarks.
Does the FSA say it is better to pay a fee?
It does not take a view, although it did originally suggest that advisers who wanted to call themselves independent should operate purely on a fee basis. It also looked at the possibility of unbundling the cost of advice from the cost of a product. It abandoned both ideas in the face of strong opposition from IFAs to the first, and an inability to work out how to unbundle costs in a way that would make sense to consumers. It now says commission may be more economic for some customers than paying a fee.
So is it working?
Not as well as it was hoped. In a letter to chief executives of financial advisory firms earlier this year, Clive Briault, managing director of retail markets at the regulator, said the results of a mystery shopping exercise had been very disappointing and that too many firms were not giving customers the appropriate, or sometimes even correct, documentation.
What is the FSA doing about this?
It is now contacting firms for further information to assess how well they are working to the rules. It will also try to work with those struggling to implement the rules and carry out enforcement measures against those unwilling to do so. The FSA hopes that the results of its mystery shopping should act as a wake-up call to many in the industry. The regulator is planning a report on depolarisation to be ready next summer after it has carried out a full review this year.
