After the first year of depolarisation, Edward Murray asks whether the removal of regulation means the market is a more open place - or if it just contains more confused customers?
It is a year since depolarisation came into force and the reaction to the rules and the impact they have had has been mixed to say the least.
For some the effect has hardly been noticeable, while for others the feeling is that clients have simply been confused further.
The Financial Services Authority (FSA) set out to create wider choice for consumers in a climate that afforded them better information and understanding of what they were buying.
Whether this has happened or whether it is still too early to tell remain moot points.
In announcing its depolarisation rules, the FSA moved away from a system in which advisers were tied to one product provider or offered products from across the market.
At the time Dan Waters, director of retail policy at the FSA, said: "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."
In turn he said this would foster competition and improve the end proposition for clients. For advisers to be called independent, it also became necessary to offer clients 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 clearer link between the advice that was given and its cost.
Improved transparency in this area would in turn create higher levels of competition and provide a better deal for clients. Certainly that was the thinking behind it.
Before looking at whether this has succeeded in practice and whether clients do actually have a better market within which to buy their protection products, it is worth seeing how well firms have complied with the rules in the first place. It is incumbent on firms to produce two documents, About Our Services and About The Cost of Our Services.
In these, firms should clearly set out what they offer and what it costs in a fashion that enables clients to compare and contrast what different firms from across the market are offering.
This, however, is not something that has been happening. In a letter to chief executives 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 clients the appropriate documentation at the appropriate time, while much of the documentation being issued was not correct in the first place.
The FSA is now in the process of contacting firms for further information to assess their compliance with the rules, while it will seek to work with those struggling to implement the rules effectively and carry out enforcement measures against those unwilling to do so.
For firms who think depolarisation is irrelevant and that the paperwork is something not to be taken seriously, Briault was very clear in his response.
He said: "We view compliance with these rules as an important element of implementing the Treating Customers Fairly principle."
Certainly for firms leaving clients in the dark through poor dissemination of information, there will be no excuse when the regulator comes to visit.
Clearly there is a good deal of work for firms to do and the results of the FSA's mystery shopping should act as a wake-up call to many in the industry.
Enough time has been given for the new rules to bed in, firms have been warned that problems still exist and the regulator is about to carry out further investigations into these processes so none can say they have not been cautioned.
But what of the success of depolarisation in terms of the purported benefits it would bring to the market? What of the wider choice it would offer consumers, and the greater clarity it would bring to their deliberations? Is it now easier for protection intermediaries to set out their stall to clients - or have they simply been hit by a costly administrative burden and an elongated sales process?
Stephen Walker, chairman of the Association of Medical Insurance Intermediaries, is under no illusions and feels the regulator's hand has been heavy in introducing something that simply was not required and which has delivered few, if any, benefits.
He says: "The amount of information we now have to provide clients tends to confuse rather than clarify the issue for consumers."
More importantly, he feels that the purpose of regulation and depolarisation may have become lost among the edicts that have come out of the FSA.
He says: "Under General Insurance Standards Council (GISC) regulation there was a duty to provide best advice and that does not stand as such under FSA regulation. In theory, if you take all the requirements, that should add up to best advice but under GISC that was the basic remit."
The intimation is that the FSA has over-egged the pudding and lost sight of the end consumer. In trying to do so much for them, the regulator has in some areas of the market ended up bombarding them with paper and protection they neither understand nor want.
What is perhaps even more ironic is that in introducing its depolarisation rules to the protection market, the FSA has simply maintained the status quo, rather than introducing the big step towards choice and competition that it announced.
Prior to regulation the protection market already operated from a broad-based spectrum of models affording clients different choices.
Depolarisation simply meant that models could remain when regulation came into force and stopped the market being forced to adopt tied or market wide stances, as was the case in the investment arena.
Nick Kirwan, market director for protection at Scottish Widows, explains: "Before January last year when protection regulation started, firms of advisers were free to adopt any depolarised business model they chose, simply because the market wasn't regulated. Some firms of advisers were effectively multi-tied, some tied and others fully independent."
If depolarisation had not happened, regulation would have forced firms of protection advisers into being either tied or independent.
Kirwan concludes: "So while depolarisation had a huge impact on the investment market, arguably for the protection market it merely preserved the pre-regulation status quo."
However, maintaining the status quo has forced extra administration and cost on to intermediaries and ultimately their clients. A much simpler classification of intermediaries and their commission and fee structures, or better design of the documentation, needs to be introduced.
Simon Burgess, managing director at British Insurance, also believes consumers have simply become confused in the melee and adds: "I think it is utterly confusing that there are various tiers of advice and I think there ought to be a level playing field where everyone has the same duty of care irrespective of how they sell their product."
This harks back to the bottom line function the GISC rules provided and Burgess continues: "That duty of care should be to provide products which are comparable to the best that is available in the market for their situation and circumstances."
Burgess also bemoans the fact that while there has been a good deal written about depolarisation over the last year, very little has been prominent in the consumer press.
What level of marketing have firms undertaken to ensure clients know what they have to offer? How have the choices that exist been conveyed to the end client by trade associations and bodies? Very little, and poorly would seem to be the answer.
This needs to improve so clients do not fall into situations where they receive advice by default rather than choice.
Classification of adviser is important to consumers and David Elms, chief executive at IFA Promotions, believes it is becoming increasingly so.
He says clients are increasingly prepared to pay a fee for advice and that numbers of enquiries from individuals looking for independent advice have soared.
Too often he says people do not pay due attention to the paperwork they are given, if indeed they are given any, and end up in a situation where they are not getting the advice they thought they would.
Good communication is the key, as he concludes: "There is a powerful educational role that the media can play in this and people have to be aware of the different types of advice that are available and the one that will suit their needs best."
The FSA remains slightly coy on the success of depolarisation and says a full report will be ready in the summer of 2007 once a review has been carried out this year.
For the protection market it would appear that the rules have done little to improve access to products for the end client.
While confusion remains, there is a real opportunity for those that can offer a clear, fair and not misleading proposition to clients and market it to them successfully.
Edward Murray is a freelance journalist
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