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Last Updated: Wednesday, 1 December, 2004, 09:29 GMT
New regime for financial advice
A pen resting on a ledger
Financial advisers will have to be upfront about all charges
A major shake-up of how financial products are sold, aimed at giving consumers greater choice, comes into force on Wednesday.

The changes mean financial advisers will no longer be restricted to offering only the products of the bank or insurance company that employs them.

Instead, all advisers will be able to offer pensions, insurance and investments from different providers.

Consumers will also get a clear choice between paying by fees or commission.

Crystal clear

The current system, known as "polarisation", which has been in place since the late 1980s, was designed to make a clear distinction between independent financial advisers (IFAs), who were not tied to any firm, and financial advisers, who were employed by a bank or insurer.

Essentially consumers will have a far greater choice
Dan Waters, Financial Services Authority

Under polarisation, only IFAs were free to offer clients products from any insurer or bank.

Financial advisers had to stick to selling the products offered by their employers.

As a result, people who went to see financial advisers may not have been sold the very best product in the marketplace, just the best that the adviser's employer had to offer.


Critics of polarisation said that consumers were unaware of the difference between what IFAs and other financial advisers could offer.

The Financial Services Authority (FSA), the City regulator, agreed. Last year it announced that polarisation would be scrapped on 1 December.

"The majority of consumers use tied advisers, from branches of high street banks and building societies, and they can now be offered a wider range of products from a variety of providers," said Dan Waters, FSA director of retail policy.

"Essentially consumers will have a far greater choice."


Another key change being introduced is that financial advisers will have to set out how much the advice they give is likely to cost.

They will do this through a Key Facts Information (KFI) sheet handed to the client before any investment or insurance product is sold.

Advisers can continue to accept commissions under the new regime.

People should be in a better position to demand more of their adviser and be able to judge what advice presents genuine value for money
David Elms, Independent Financial Advice Promotion

But to avoid the risk of bias, they must also offer consumers the choice of paying a fee for the advice they receive.

This is known as the "menu" approach, and will also require the adviser to tell the customer which firms he or she acts for.

"This will leave consumers in no doubt that advice costs money whether in the form of fees or commission," David Elms, chief executive of Independent Financial Advice Promotion, told BBC News.

"People should be in a better position to demand more of their adviser and be able to judge what advice presents genuine value for money."

As a result of the introduction of KFIs, Mr Elms predicts that the numbers of people choosing to pay a fee rise sharply.

"At present, one in 10 financial consumers choose fees over commission, but within five years that could rise to one in four," he said.

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