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Is depolarisation the way to solve the savings gap?
Financial analysts have stated that there is an ever-increasing savings gap. The Financial Times reported that one in three Britons is not saving for retirement. Ways of saving have changed. Currently, many people invest in property rather than investing with the help of a financial adviser. The property market has already shown signs of stabilising and this method of investment may not be as reliable in the long term as it first appeared. If this is the reality of the situation, the pension deficit will increase.
Independent financial advisers (IFAs) are the answer. They can guide their customers effectively through the myriad of investment methods that exist. To do this, customers need to have confidence in their IFA. However, the financial advice profession has been undermined over recent years in the wake of mis-selling products, specifically endowment policies. Industry analysts have carried out research that found that customers do not understand the way that IFAs are regulated. This should change with new regulations produced by the Financial Services Authority (FSA) that embrace the process of depolarisation.
What is depolarisation?
'Depolarisation' means that restrictions allowing advisers to only sell certain financial products have been lifted. The depolarisation rules were implemented on 1 December 2004. All advisory firms were required to comply with them by 1 June 2005. Those that wished to depolarise in the transitional period (ie, between 1 December 2004 and 1 June 2005) had to notify the FSA in writing of the date on which they changed regime.
What does depolarisation introduce?
The traditional view of an IFA is someone who promotes a particular financial product (eg, life insurance or pension schemes) and also provides advice. In many cases the IFA receives a commission for each financial product that he/she sells. Depolarisation shifts the focus away from this commission-based approach to ensure that the essential thing that IFAs provide is advice. It must be made clear to the customer at the outset that this advice is not free but part of the service provided. IFAs must also include details of their commission for each financial product.
This new approach means that IFAs must have a clear and reasonable charging and commission scheme. IFAs wishing to continue to call themselves 'independent' must offer all customers the option of paying a fee for any advice, as well as providing whole-of-market advice.
This is where solicitors come in. It is vital that the regulations are complied with otherwise IFAs could face claims of professional negligence.
What is the impact for consumers?
IFAs must now adopt an advice-based rather than a product-based approach. This invites transparency and will hopefully improve consumer confidence in the financial advice sector. It is too early to tell where the impact has been felt, but one school of thought is that that the main impact of the regulations will be in the banking sector. On the other hand, enthusiasts of the new approach believe that it will reinvigorate the entire financial services industry.
Victoria Pender is a first-year trainee in Browne Jacobson's Professional Indemnity Team.