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Friday, 22 November, 2002, 11:54 GMT
Q & A: How changes to financial advice affect you
The way in which financial products are sold in the UK is about to change drastically. 'Polarisation' rules - which meant firms that were not Independent Financial Advisers (IFAs) could sell only their own company's products - are to be scrapped. BBC News Online looks at what these changes will mean for the marketplace and for consumers.

What has changed?

In future, financial advisers employed by companies will be able to offer consumers a choice of products from a whole range of providers.

Only 1 in 10 consumers would be prepared to pay such fees for financial advice, most want to be given the choice and the FSA has reacted to this reality.

David Elms, IFAP chief executive

In the past a financial adviser who worked for a bank or any other financial institution would have been duty bound to sell only the products offered by his own firm.

Why was this so-called polarisation rule introduced in the first place?

Polarisation was introduced back in the 1980's, when the first wave of pensions mis-selling came to light.

The idea was to draw a clear line in the mind of the consumer between a financial adviser and an Independent Financial Adviser (IFA).

However, most industry commentators agree that this has not worked because the majority of financial products, such as mortgages, are sold by financial advisers from High street banks and building societies.

This has meant that consumers have been prevented from shopping around because the people they are taking advice from are barred from offering a range of products.

The Office of Fair Trading (OFT) has conducted a number of investigations into the regime, notably in March 1987 and August 1999.

On both those occasions, the OFT found that polarisation distorted the marketplace.

The industry watchdog, the Financial Services Authority (FSA) is introducing the changes to free the market and promote consumer choice.

So will financial advisers still get commission if they sell a particular company's product?

The practice of advisers - both independent and those employed by a bank or financial institution - accepting commission for recommending a particular product is to continue.

The paying of commission to advisers has often been linked to cases of mis-selling.

The Consumers' Association has long argued against commission, making the powerful point that even independent advisers would find it difficult to ignore the lure of recommending products which paid them a healthy sum.

However, the FSA has decided that to bar commission and move to a system of fee-based advice would price many consumers out of the market.

A full financial review carried out by a qualified IFA can cost from 700 in some parts of the UK.

David Elms chief executive of Independent Financial Advice Promotion (IFAP) and a powerful voice lobbying the FSA told BBC News Online: " Only 1 in 10 consumers would be prepared to pay such fees for financial advice.

" Most want to be given the choice and the FSA has reacted to this reality."

The FSA is to strive for greater clarity in the way advisers are paid with the introduction of a 'Menu' approach.

What is a 'Menu' approach?

For once this is jargon that does exactly what it says on the tin.

Under the new system, advisers will have to offer clients the option of either paying a fee or accepting that the adviser will be paid by commission.

The danger is that IFAs will be bought by banks which will offer limited choice

Consumers' Association

In addition, an adviser will have to make it clear which firm they work for.

The customer must be given all this information before the product is sold to them under a new "checklist" which the FSA has been developing.

However, one area of protection for the public will disappear.

Sounds ominous - what area of protection is going?

Under current rules, if an IFA firm is part owned by a product provider it cannot recommend that provider's products unless it can prove that it is better than the best in the marketplace.

The idea was to prevent IFA firms becoming financial advisers in all but name.

This 'better than best' rule has now been discarded by the FSA.

In response Mr Elms warned: "It is absolutely crucial that in discarding this rule that we do not end up with a blurring of financial advisers and IFAs."

Mr Elms said he believed it was important to prevent this from happening.

"Commercial reality will mean that financial advisers will not have whole market access - unlike an IFA - instead their bosses will dictate a range of products from which they will be able to sell from."

The Consumers' Association is even more concerned, a spokesperson told BBC News Online: "The danger is that IFAs will be bought by banks which will offer limited choice."

The FSA said it would put 'extra measures' in place to ensure firms kept their independence.

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