SIFA 9.7 Depolarisation

Polarisation required firms that advise on packaged products to be either independent financial advisers (IFAs) who sell products from the whole market place and charge fees; or representatives selling on behalf of a single company (or group). These rules changed on 1 December 2004 when the depolarisation rules came into effect. Under these rules firms may offer advice with the following scope (COB 5.1.6A R):

• from the whole of the market, or
• from a limited number of providers, or
• from a single provider.

There is guidance on the scope and range of advice on packaged products at COB 5.1.6B G. You can expand the scope of advice beyond the scope previously arranged with the customer provided you make the customer aware of the proposed change in advance in a durable medium.

The Insurance Mediation Directive requires enhanced disclosure when business relates to life policies - see COB 4.3.19 R to COB 4.3.26 R. Firms can comply using the IDD. Firms will also need to provide a 'statement of demands and needs' (unless these points are covered in the suitability letter before conclusion of the contract) - see COB 5.2.12 R to COB 5.2.17 G.

A firm must not hold itself out as independent unless:

• it provides advice from the whole market (or the whole of a sector of the market), and
• it offers the customer the opportunity of paying fees for the provision of such advice (COB 5.1.11A R).

This means that a firm cannot use the word independent in its name unless it offers customers the opportunity of paying by fee.

The IDD may be found at COB 4 Annex 4 R. On first making contact with a private customer with a view to advising etc on packaged products you should provide an IDD. The activities that require this disclosure are set out at COB 4.3.3 R (1)(a). Any loans to the firm as well as share ownership of 10% or more must be disclosed in the IDD. Where the IDD is provided by an appointed representative, it must cover loans made to or by that appointed representative or holdings in or held by that appointed representative.

Downloadable templates of the document are on our website at: http://www.fsa.gov.uk/Pages/Doing/Info/disclosure/index.shtml. Any terms of business not covered by the IDD may be attached to the IDD or provided to the client as a separate document.

The menu may be found at COB 4 Annex 6 R. You should give out a menu on first making contact with a private customer with a view to providing advice on packaged products (COB 4.3.3 R), or on request (COB 4.3.5 R).

If you allow payment by commission you will need to disclose the higher of commission or commission equivalent if you are in the same immediate group as a product provider (i.e. you are more than 50% owned by a provider or otherwise controlled by a provider) (COB 5.7.5 R). A firm can have more than one menu as it may offer a different charging structure to different groups of clients. The menu disclosures are in addition to the existing disclosure of actual commission in cash terms.

To help firms to complete their menus, we have developed a calculator using Excel software. This will help you to identify your firm's own maximum commission levels by comparing different commission shapes and giving you the corresponding market average. The calculator is available on our website.

A small investment business firm can be the appointed representative of a network or another firm (the principal). In this case, the network, or principal, is responsible for the training and competence of the appointed representative and for ensuring compliance with the FSA rules, including the depolarisation rules. Appointed representatives will need to agree the scope and range of advice they give with their principal.

Offering independent, whole-of-market advice does not mean that you must search the entire market of packaged products for each and every customer. You may maintain a panel of 'preferred' packaged products selected from those generally available in the market. As long as the panel is made up of products from a sufficiently large number of providers, is selected following a reasonable analysis against definite criteria reflecting adequate knowledge of the products available on the market which are applied equally, and is reviewed regularly (and whenever significant market changes require it) we consider the practice acceptable (see further COB 5.1.6B G (4)). We would always expect a firm using such a panel to have written instructions describing the criteria to be applied in selecting or reviewing products and to maintain a full written record of its initial selection and subsequent reviews.

Both the IDD and menu must carry the Key facts logo. The logo may not be used on any document where its use is not mandated by FSA rules (GEN 5.1).

Firms need to secure customer agreement to fee charging arrangements before starting to act for a private client (COB 4.3.6 R (1)). If charging solely by fee you may only retain trail commission where it would be manifestly disproportionate for your firm to be required to account to the customer and you have agreed a maximum amount to be retained each year with your customer (COB 4.3.6 R (2)). Paragraphs 2.119-2.122 of PS04/27 set out what we mean by a fee.

If the firm receives a complaint that is the responsibility of another party to the transaction you must have procedures in place to refer it to the appropriate party (DISP 1.2.1 R and DISP 1.4.18 R). The records you keep should also include the documentation relating to the referral of a complaint under DISP 1.4.18 R (DISP 1.5.2 G).

The scope of advice of the firm (whole-of-market, multi-tied, single-tied) will require different competences on the part of the firm's advisers to enable it to discharge its advisory functions.