Say the word polarisation to most people and they will think vaguely of Scot of the Antarctic. It is only in the financial services industry that the word takes on a whole new meaning. It refers to a rule which splits the financial market between independent financial advisers who in law act on behalf of their client and offer financial advice from all products available in the market place and those who are tied to the products of a particular company.
This clear separation hasn't been around forever. It was one of the consequences of the first regulatory regime set up under the Financial Services Act in 1987. But it has been earning its keep since then. There is a growing understanding of the difference between advice tied to a particular product provider and the choice available from an IFA. The share of business undertaken by independent advisers has risen which suggests that people like the idea.
So polarisation seems to be working. However, all good things may not come to an end but, in the financial services world, they certainly come up for review. Last year the Director General of Fair Trading decided that polarisation might be working anti-competitively, especially in the area of short-term investments. He thought that tied salesmen ought to be given the opportunity to select from a wider range of products.
How the investor would cope with a salesman who proclaimed choice in part of his product range but was much more limited in other areas was never really explained. However, the review train was in motion and is now rumbling through the Financial Services Authority (FSA), which in turn has to report either to the Treasury or the Competition Commission.
You would have thought that we would know where the final report was going but this is the time of heavily amended Financial Services and Markets Bill so the ultimate destination remains unclear. The best we can hope for is that the train knows where it is going.
And should all this review end in change? Certainly, the case for change from an investor's perspective has not been fully articulated. How will investors know whether they are being offered a full choice or a restricted choice? Will investors feel confused? Will there have to be further regulatory intervention to check the proper information has been given? Will some of the welcome developments in the financial services market, which have seen growing levels of professionalism and expertise, be put in reverse.
Another factor which has been somewhat overlooked is the cost implications of change. If arrangements within an industry are altered, then there are a raft of costs which inevitably are incurred. And the investor ends up paying the bill.
My conclusion is unequivocal. If ever there was a case for saying "if it ain't broke don't fix it" then it applies to this rather obscure area of financial services regulation.
Paul Smee is Director of the Association of Independent Financial Advisers (AIFA)Reuse content