Outlook: End of polarisation opens up a Pandora's Box

No one much quarrels with the proposition that as things stand there's a lot wrong with the way life assurance, pensions and other savings products are sold. The theory is that "polarisation" protects the sanctity of independent financial advice. But like most artificial constraints constructed in the name of consumer protection, it doesn't really work that way in practice.

No one much quarrels with the proposition that as things stand there's a lot wrong with the way life assurance, pensions and other savings products are sold. The theory is that "polarisation" protects the sanctity of independent financial advice. But like most artificial constraints constructed in the name of consumer protection, it doesn't really work that way in practice.

The nature of the problem is easily defined. The great bulk of life products by volume are sold either directly or through tied agents like banks, which means that most consumers don't get a choice unless they go out and seek it. But even if you are among the 20 per cent who buy through independent financial advisers, you don't necessarily fare much better. IFAs take their fee as a commission on the sale, and therefore have a natural bias to sell products that pay the best commissions.

The question is whether the root and branch reform proposed by the Financial Services Authority yesterday will correct the problem. The FSA proposes that the rule that forces firms to be either an IFA or a tied agent but bans anything in between be swept away. By so doing the FSA hopes to encourage new forms of low cost distribution where the ordinary saver is able to get a higher degree of choice.

At the same time it aims to make the amounts charged by IFAs more transparent by forcing them to charge overtly for their advice. Since most punters would not want to pay upfront for advice, commissions will still be allowed, only they will have to be declared and the difference rebated to the consumer.

Lord Hunt, the chairman of the Association of Independent Financial Advisers, reckons the proposals are a leap in the dark. A simple system that works as it should in providing the consumer with independent financial advice is being replaced in the name of competition by a free for all that will result in chaos and a frenzy of reorganisation.

Well, on the latter point he's certainly right. Some smaller IFA's might find it difficult to survive once banks and others start to offer a real, if limited, choice of life products. But whether the market as a whole will suffer is a moot point. The great 80 per cent unwashed of buyers who don't at present use an IFA, can't help but benefit, since they ought in future to be able to get some degree of choice. As for those who do buy through an IFA, it's hard to see how they would be positively disadvantaged by the proposed defined payments system. All it does is provide greater transparency on charges and commissions, and there cannot be anything wrong with that.

There are caveats, however. Rarely does free market reform work out in quite the way it's intended to, and abolition of the polarisation rules may be the savings equivalent of the beer orders in the 1980s, which ultimately brought few if any benefits to the consumer. Ten years after they were introduced, there was less consumer choice, more concentration of market power, and the only constraint on beer prices these days seems to be the Channel tunnel. Small wonder that one of the few industry organisations not to condemn yesterday's proposals outright was the Association of British Insurers, which represents the big battalions of the savings industry.

Andersen's nemesis

Whether the collapse of Enron was down to poor accounting standards, inadequate or even corrupt application of the standards, auditing error, or outright deception is still for investigators to determine.

Unlike Britain, which had its cathartic experience which led to a tightening up of accounting in the high rolling Eighties, there are no overt standards in the US to deal with off-balance sheet finance and related party transactions, two of the key elements in the Enron collapse. Undisclosed special purpose vehicles allowed Enron to borrow far more than it safely could, while the finance director's position at the heart of one of these vehicles would have acted as a clear warning signal had it been generally known.

Poor application of the rules was plainly a problem too. The finance director and the head of accounting were both former Andersen men, the Enron account provided the bulk of the fees earned by Andersen's Houston office, the firm earned as much from Enron consultancy as it did from the audit, and so on and so forth.

By the end, Andersen seemed to be a captive auditor that raises issues about how it could be relied on to provide shareholders and creditors with a credible and impartial view of the accounts. Sadly, these conflicts of interest are not specific to the US. In pursuit of extra fee income, audit firms routinely seek a closer relationship with their clients than their role as independent auditors demands, and in some cases have taken over management of the entire accounting function of the company.

The other two factors will be harder to pin down, not least because Andersen has destroyed large tracts of the audit trail. Again, this is by no means uncommon, particularly in the US, where a culture of litigation can make it pay to keep records to a bare legal minimum.

All these things are going to change in the wake of the Enron collapse, and because we these days live in a global village, the new standards so created will be more international than ever before. With every business downturn a whole new set of weaknesses become exposed, and with every upturn comes a legion of young turks determined to believe the old rules shouldn't apply to them.

The independent audit, diligently pursued in accordance with strict rules of disclosure and standards of practice, is one of the cornerstones of the free market capitalist system, and it is essential that its integrity is preserved. Enron has proved a sobering lesson in what happens when it is not.

Ford's might, right

As David versus Goliath contests go, they would not appear to come much more clear-cut than UPF-Thompson, a tiny but now insolvent component supplier, up against the mighty Ford Motor Company. Except that, in this case, right is on the side of might for once. UPF-Thompson is sole supplier of the chassis for the Discovery, which is produced by the Ford-owned car maker Land Rover at its factory in Solihull. "Sole supplier" agreements of this sort are designed to give small component makers security, enabling them to plan and invest for the future, safe in the knowledge that the business is not about to be taken away from them.

However UPF-Thompson, or rather its administrative receivers KPMG, have decided to use the sole supplier status to cut off supplies and bring the Discovery line to a juddering halt unless Ford agrees to hand over £35m to keep the business afloat. Ford is not responsible for the demise of UPF-Thompson. It managed that all by itself by over-extending itself on a supply contract with Ford's arch competitor, General Motors.

KPMG insists that it is only fulfilling its obligation to treat the contract with Land Rover as an "asset", pointing to legal precedent in a previous case involving Geoffrey Robinson's failed engineering company Trans Tec. If Ford refuses to budge, it risks having to stop Discovery production for months while a new supplier is found. But if it caves in then it opens the floodgates to a deluge of copycat demands from other suppliers who find themselves on hard times. Ford should stand firm.

j.warner@independent.co.uk