The City watchdog has announced the biggest shake-up of the way financial products are sold for more than a decade.

We are convinced that a freer market will help consumers more

Sir Howard Davies, FSA chairman

The Financial Services Authority's decision means that the current system, which has been in place since 1988, known as "polarisation", will be abandoned.

The final decision was made by the FSA's board on Thursday afternoon - and the change will be introduced by the end of 2003.

However, the reforms have received a mixed welcome from industry bodies and the Consumers' Association have condemned the changes as posing a 'danger'.

Under the current system, firms that are not independent financial advisers can sell only one company's products.

The new regime, which is aimed at improving consumer protection, will mean that companies will be able to offer consumers a choice of products from a whole range of providers.

Menu approach

Firms will only be allowed to call themselves independent financial advisers if they offer products across the entire market, the regulator said.

Advisers can continue to accept commissions under the new regime.

But to avoid the risk of bias, they must also offer consumers the choice of paying a fee for the advice they receive.

This is known as the "menu" approach, and will also require the adviser to tell the customer which firms it acts for.

The customer must be given this information before the product is sold to them under a new "checklist", which the FSA has been developing.

Better than best

The regulator is also abolishing the "better than best rule" which prevents firms from simply recommending their owners' products.

Under existing rules, independent financial advisers are not allowed to sell the products of a company which has more than 10% stake in the firm, unless they can prove it is superior to any other product in the marketplace.

Removal of the 'better-than-best' rule...puts consumers at risk from being sold inferior products

Allan Asher Consumers' Association

This rule is being abolished so that financial companies can generate more investment.

Many providers have been jockeying for position in anticipation of the rule change over the last year.

The FSA said extra measures would be put in place to ensure firms kept their independence.

Better for consumers

Sir Howard Davies, FSA chairman, announced the decision at the Association of Independent Financial Advisers annual dinner on Thursday night.

Sir Howard said: "The polarisation rule has not delivered the consumer benefits hoped for when it was introduced.

"We are convinced that a freer market will help consumers more.

"In future consumers will find it easier to shop around for the best products and providers will be free of the anti-competitive constraints that have made it difficult for them to offer consumers that choice."

Mixed welcome

David Elms chief executive of the Independent Financial Adviser Promotion (IFAP) and a powerful voice lobbying the FSA told BBC News Online: "We welcome the changes as they will lead to greater transparency.

The FSA has recognised that people want a choice of fee or commission based advice rather than be forced down either path."

The Consumers' Association, already a heavy critic of the regulator for its handling of endowment mis-selling has condemned the FSA proposals as only serving the interest of banks and insurers.

" Removal of the 'better-than-best' rule, which prevents firms from selling their own products unless they are better than any other, puts consumers at risk from being sold inferior products," Allan Asher, director, campaigns and communications, said.

long-awaited decision

The FSA's decision to abolish polarisation follows criticism of the system from the Office of Fair Trading.

The OFT has conducted a number of investigations into the regime, notably in March 1987 and August 1999.

On both those occasions, it found that the polarisation rules were anti-competitive, and restricted and distorted competition between distribution channels.

Earlier this year, in a response to the FSA's consultation on the proposals, the OFT said the system was restrictive, did not produce sufficient benefits for consumers and should be replaced by a more liberal and transparent regime.