Association is concerned over FSA's plan for shake-up.

Byline: Meurig Phillips

INDUSTRY watchdog, the Financial Services Authority (FSA), has released its ideas aimed at improving the choice available to consumers.

Central to their plans is the question of polarisation or status of financial advisers.

Currently, financial advisers are either tied, meaning they can only sell the products of the company they represent - typically high street banks or large insurance companies - or be independent, whereby they advise on the products of a wide range of providers in the marketplace.

The current situation has arisen as a way of safeguarding consumers and simplifying the process of receiving financial advice. The FSA has now proposed abolishing polarisation in favour of the introduction of another level of advice, namely 'multi-ties' or 'distributor firms'.

This will allow tied advisers to offer products from a limited range of companies in addition to their own.

Furthermore, firms wishing to remain wholly independent will have to conform to a 'defined payment system', which requires an upfront agreement between the customer and the Independent Financial Adviser (IFA) defining in advance the amount to be charged.

This would prevent IFAs from being directly remunerated by means of commission from product providers.

Interestingly, research commissioned by the FSA indicates that consumers presently have a preference for independent advice. Arguably, this could be restricted by the reduced number of IFAs that would result as a direct consequence of the FSAs proposals.

The research points out that 80 per cent of people receiving financial advice are covered by the tied sector; the other 20 per cent being serviced by IFAs. Under the FSA guidelines, advisers in the tied sector including multities, will be remunerated by way of commission!

The proposals have met with a heated response, not least from the Consumers' Association which believes the abolition of polarisation will increase consumer confusion.

Sheila McKechnie, director of the association, said:

"Instead of boosting independent advice, which our research has shown to be the best way of providing a high quality, professional service, these reforms are likely to squeeze IFAs out of the market."

Ms McKechnie added that the Consumers' Association was "extremely concerned" about the introduction of multi-ties which would "significantly boost the power of product providers and high street banks" (Financial Adviser, 17 January 2002).

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