James Daley: From the regulator: more confusion, less transparency for investors

Next year, the UK financial advice market will be turned on its head yet again, as the City's regulator scraps the current clear distinction between independent and tied advice (so-called polarisation), allowing advisers to get into bed with whoever they want.

Next year, the UK financial advice market will be turned on its head yet again, as the City's regulator scraps the current clear distinction between independent and tied advice (so-called polarisation), allowing advisers to get into bed with whoever they want.

At the moment, if you want advice, you've got a straightforward choice between two breeds: the independent financial adviser (IFA), who must offer you products from the whole market, or a tied adviser, who can only sell you what his company offers.

The best example of this species is the man behind the counter at your local bank. He'll happily give you advice on your finances, but when he's done, he'll only be able to put your money into one of his own company's products (which are often inferior to those in the wider market). IFAs are not so restricted, but can prove more costly.

When the regulator first started reviewing financial advice almost four years ago, standards were undoubtedly poor, but few consumers had a problem with the concept of polarisation. Indeed most said that independence of advice was key to them. The problems in the market were about levels of competency and the way in which advisers got paid.

Under next year's rules, however, the valued concept of independence will go out of the window. With life insurers and fund managers having already begun snapping up stakes in financial adviser companies, it is more than likely that in the de-polarised world, your so-called "independent" salesman might just happen to be owned, and ultimately get his wages paid, by a big financial services group.

If this doesn't put you off using an IFA, the other snag is that they will become an increasingly rare breed. Only two weeks ago, Bradford & Bingley, the UK's largest IFA, said it would be ditching its independent status to become tied to a handful of providers.

For the consumer, this can only cause confusion - creating some six different types of adviser compared to the current two.

The scrapping of polarisation is unfortunately characteristic of so much of the change which has swept the financial services industry over the past few years. After setting out to address a simple problem - in this case, the poor standards and lack of transparency in the financial advice market - the end result is an unnecessary hatchet job which manages to throw out the baby, and hang onto the bath water.

Slow-burning initiatives such as "compulsory professional development" (basically homework for advisers) - which are meant to improve standards of advice - are hardly the kind of decisive, proactive policies which will ensure those who are not up to their jobs are weeded out as soon as possible.

The regulator has also missed its chance to ensure there is transparency across the whole market in relation to the murky world of commission. While those who want to call themselves "independent" will have to offer clients the choice to pay by fees or commission, the new breed of "multi-tied" advisers will not be subject to such a discipline. This leaves the door open for the continuation of a world where your adviser's remuneration does not always have much to do with the service he's providing.

While the annual commissions which advisers take from your investments may be what keeps them in business, this needs to be matched with an ongoing service. If there are upfront costs, then it would not be unreasonable for advisers to ask customers for a small fee. Yet the new rules donothing to encourage this.

As the regulator's four-year rampage comes to a close, it would be unfair to not acknowledge that some improvements have been made. But for every two steps taken, there has been at least one step back. The polarised advice market survived 15 years, and on the eve of the introduction of a new flawed regime, the odds are this will enjoy an even shorter existence.

* WHile it was reassuring to see so many insurers standing by their pledge to offer affordable flood cover to their existing customers this week, following the events in Boscastle (above), it remains a shame that most still won't cover new customers. For those who are out of the loop, however, there is a small handful of specialists, such as Bureau Insurance (01424 220110), which will offer cover if you invest in flood defences. If a small insurer can make a go of such business, surely it is well within the capability of the larger groups to follow suit.

Ladyman's daydream solutions for the elderly

Stephen Ladyman, the Government's junior health minister, appears to be going slightly doolally. After months of refusing to give a straight answer over the financial difficulties facing the elderly (especially those in care), his latest wheeze has been to try exactly the opposite tack - bombarding his critics with a host of bizarre and totally impractical ideas which he reckons will address the problems.

The best of these, revealed in The Independent on Thursday, is his plan to encourage elderly people to give up their spare rooms to young jobseekers. In return for cheap rent, these twenty-somethings will apparently help with the cleaning and chores, while keeping their new housebound surrogate grandparent up to date with the latest politics in their office, and everything else going on in the outside world. Presumably, 80-year old Elsie won't mind too much if she's asked to make herself scarce for the night when her new lodger wants to have a few friends round.

Other top-10 daydreams include Mr Ladyman's swap-a-relative idea. This bright proposal suggests that if your grandma lives too far away for you to care for her, you can look after someone else's Grandma instead. In return, someone nearer your Gran will take care of her. Inspired.

This and more can be found in Mr Ladyman's green paper to be published this autumn. While this promises to also address some of the bigger issues, such as lack of transparency over long-term care benefits, the absurdity of his suggestions so far are hardly an encouraging taster.

j.daley@independent.co.uk