CUSTOMER AGREED REMUNERATION - CRA International

ABI RESEARCH PAPER 6 

CUSTOMER AGREED 

REMUNERATION 

RESEARCH INTO THE MARKET IMPACT OF ENCOURAGING 

CUSTOMER AGREED REMUNERATION 

Report by CRA International 

January 2008

Aims and scope: The Association of British Insurers (ABI) is the trade body representing the UK’s 

insurance industry. The ABI Research Paper Series is used to publish the research that the ABI 

carries out on behalf of its members. The series, launched in October 2006, builds on the success of 

previous ABI research, in order to help inform the insurance industry and contribute to public policy 

debate. 

Series editor: Rebecca Driver, Director of Research and Chief Economist, ABI 

Author: This paper was written by Kyla Malcolm, Tim Wilsdon and Charles Xie of CRA International 

(UK) Ltd, 99 Bishopsgate, London, EC2M 3XD. 

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Disclaimer: The analysis presented in this paper is based on research undertaken by Kyla Malcolm, 

Tim Wilsdon and Charles Xie of CRA International (UK) Ltd. The views expressed in this paper are 

those of the authors, not CRA International. The analysis does not necessarily reflect the views of 

the Association of British Insurers, or its member companies. The research was carried on behalf of 

the ABI and its members and was not intended to be relied on by a wider audience. This paper is 

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Copyright: © Association of British Insurers, 2008. The information may only be used for private or 

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ISBN 978-1-903193-35-4

EXECUTIVE SUMMARY 


CRA International (CRA) was asked by the ABI to conduct research into the market 

impact of encouraging Customer Agreed Remuneration (CAR) as a method for 

determining intermediary remuneration for financial advice. The objective was to 

assess its impact on actual or perceived bias resulting from the current remuneration 

models, and whether it encourages additional saving and greater provision of advice. 

To achieve this objective CRA, in collaboration with ORC International, has researched 

the reaction of consumers, intermediaries and providers to the CAR model: 

• To understand the reaction to and understanding of CAR, eight focus groups 

were undertaken with both current and potential consumers. This was used to 

design a face to face quantitative survey of 300 consumers to estimate the 

extent to which consumers would react positively to the CAR model. 

• The reaction of intermediaries was tested through 18 detailed interviews with 

different types of intermediary (including nationals, networks and individual IFAs 

and multi-ties), this was followed by a telephone survey of 100 IFAs and whole 

of market advisers. A questionnaire was sent out to establish high level 

compliance costs. 

• Interviews were undertaken with providers already offering CAR style products 

and providers who were thinking about developing these in the future (15 

interviews were conducted in total). A compliance cost questionnaire was also 

sent to providers. 

What would be the impact of CAR on the demand for advice? 

The CAR model is likely to increase demand for financial advice and products. For this 

to occur it is important that it is explained in a way that is understood by consumers. 

This should raise consumer confidence in the industry. 

Evidence from consumers and intermediaries that have adopted CAR style models is 

that consumers understand and value the greater transparency it brings. However, at 

present it is primarily used for higher net worth and more sophisticated consumers 

who are not typical of the market as a whole. Survey evidence suggests that the 

majority of consumers find the concept straightforward to understand. It would 

remove the perception that advice is free and prompt consumers to ask their adviser 

what services they are receiving for the advice charge. 

There is evidence that consumers value the transparency of a separate advice and 

manufacturer charge and this would contribute to raising the degree of trust that 

consumers feel towards the industry and financial advisers in general. It is difficult to 

quantify the benefits that would result from this, but it could result in an increase in 

demand as customers would be more likely to follow the recommendations of their 

3

REPORT BY CRA INTERNATIONAL 

advisers. Our research found that 5% of existing customers would invest more money 

and 15% would visit their adviser more often. 

Among non-purchasers (those who have not purchased financial products through a 

financial adviser), although 37% agree that CAR would increase the likelihood that 

they would use an adviser, as they would only become aware of this when using a 

financial adviser and only 10% had previously stated that they had not used an 

adviser before because they did not trust them. For this reason we do not assume that 

there will be an increase in demand from non-purchasers in the short-term, although it 

may increase demand in the medium-term. 

There is, however, a risk that the greater transparency will lead a group of consumers 

to take advice but then choose to purchase directly from the provider. Intermediaries 

may need to make changes to the way they charge for advice to counter such 

challenges. Other consumers believe that providers will find ways to continue to 

influence their intermediary, for example by offering factoring arrangements. 

What would be the impact of CAR on the supply of advice? 

One of the issues regarding the introduction of CAR is that it could reduce the potential 

for cross-subsidies between different consumers if the greater transparency leads 

clients to negotiate. This could result in consumers with a smaller amount to invest 

finding it more difficult to access advice as supply is withdrawn from this segment. 

There are a number of reasons to be slightly sceptical regarding the size of the effect 

of cross-subsidies. Firstly, advisers could already choose not to service these 

consumers today and this would increase their profitability. Secondly, price 

discrimination already occurs through active consumers requesting rebates, although 

CAR will encourage a further move in this direction. Thirdly, advisers already 

differentiate between clients and consumers, with clients seen as being in a long-term 

relationship (that may not be economic in the short-term but will be over the longer 

term). 

However, CAR is unlikely to reverse the trend for IFAs to serve fewer lower value 

clients although this may be partly offset by clients being more confident in the 

industry and less resistant to purchasing in the first place. 

CAR could influence the role of nationals, networks and service providers, so that they 

focus on using their bargaining power to negotiate better terms on product pricing for 

the consumer and use this to market their services to consumers. 

Which product and intermediaries should be included within the CAR 

model? 

Without additional encouragement, the use of CAR will grow but will only be used in 

certain market niches. In particular, it is unlikely that there will be significant use of 

CAR by nationals and networks or tied advisers. Although providers will increasingly 

4


offer products of this type, they will remain focused on single premium investment 

products. 

In order to determine where CAR could bring benefits there are a number of important 

issues to take into account. It is clear from the evidence from consumers that given 

the complexities of the retail financial services market, consumers would favour a 

simple system applied to all products and all types of adviser. However, there are 

strong arguments indicating that CAR is more appropriate in some parts of the market 

than in others, including: 

• The mechanics of applying CAR: the application of the CAR model for single 

premium products is simpler than regular premium products. 

• Evidence regarding provider bias: Previous research by CRA found that provider 

bias is most problematic for single premium products rather than regular 

premium products. 

• Evidence regarding product bias: Previous research by CRA found that product 

bias is more problematic for the IFA channel than for the tied channel. 

In retail investment products, the great majority of the value of investments are 

structured as single premiums but, given the potential for substitution between regular 

and single premiums, our evidence supports the application of CAR to all retail 

investment products irrespective of the premium type. The difficulty of applying CAR to 

small regular premium products without factoring, however, suggests that caution is 

required regarding the potential application to protection products. 

Issues regarding the application to different types of intermediary appear more 

straightforward. One of the advantages of CAR is that consumers will be made aware 

that the cost of advice has implications for the price of the overall product i.e. that 

advice is not free. Despite negotiation over the cost of advice being unlikely in the 

short run in any channel, in most parts of the tied channel it is difficult for consumers 

to distinguish between the provider and the adviser – especially in the banking channel 

– and hence it may never be possible for the consumer to negotiate with the adviser. 1 

Furthermore, the incentives faced by advisers in the tied channel are not directly 

related to the cost of advice that is, or would be, disclosed. Hence CAR would not, in 

itself, remove the potential for product bias. Finally, it is unclear that tied providers 

can differentiate between consumers who want ongoing advice and those who do not. 

Thus there is reason to be sceptical that CAR can bring clarity to the role of, and 

payment for, ongoing advice in the tied channel. 

Our research also found differences in consumer perception regarding tied advisers 

associated to banks and insurance salesforces. When asked, many consumers see 

advisers within banks as performing a sales function and are less concerned regarding 

how they are remunerated. Consumers are less likely to suggest the application of CAR 

to the insurance tied channel compared to the bank tied channel. 

1 Consumers did not identify as a distinct group advisers operating as a separate business with a single tie. 

These advisers may face remuneration structures similar to IFAs, but evidence regarding consumer reaction 

to these advisers is not available and hence strong conclusions about them can not be drawn. 

5


We therefore do not recommend making it compulsory to use CAR in the tied channel, 

instead, providers could be encouraged to ensure the incentives faced by tied advisers 

remove any potential for product bias. 

Do the benefits of moving to CAR outweigh the costs? 

There are a number of clear benefits from the introduction of CAR including: increased 

consumer confidence removing a barrier to participating in the market; removal of 

potential for bias; and improved competition. 

The benefits from increased trust and increasing demand for advice are likely to be the 

most significant benefits of CAR but the value of benefits arising from these is difficult 

to quantify. 

In terms of the removal of bias, CAR should reduce the potential for provider bias. 

Assuming that advisers will set the price of their services so that it does not vary by 

provider, this could bring benefits of around £66 million a year if provider bias is 

completely removed. This assumes provider bias does not re-emerge through 

competition focusing on factoring rates and decency levels. 

Removing provider bias should result in competition intensifying around the design of 

product terms that meet consumer needs and the principles of Treating Customers 

Fairly (TCF). If this is the case, there will be additional benefits resulting from 

providers offering superior products. Where providers have introduced products 

compatible with CAR, a number of them have been able to reduce the charges to 

consumers (reflecting their expectations regarding improved persistency) making 

these products favourable for some consumers. 

Finally, there are other potential benefits that are likely to occur over a longer period 

of time as the market develops: 

• As consumers become accustomed to CAR, it is possible that in some cases it will 

lead to customers negotiating with their adviser regarding the cost of advice. 

Some may be more likely to shop around to see if they can get better value 

advice. Given the lack of shopping around today it is right to be cautious about 

the magnitude of this effect in the short-term. 

• When CAR is explained to non-purchasers, they also report that this increases 

their confidence and could encourage them to see an adviser. In practice they 

will only learn of CAR when they approach an adviser (or indirectly through word 

of mouth), so this could reduce the barriers to these consumers accessing advice 

but is only likely to increase demand in the medium-term. 

• New approaches to charging for advice could result in simplified structures, such 

as using the same charge for an investment fund and an investment bond. This 

would reduce the potential for product bias, which is generally accepted to be a 

larger problem than provider bias, however this is only likely to occur in the 

medium-term. 

6


• CAR will require advisers to explain their services and the degree to which these 

will be provided over time. This will reduce confusion regarding the role of trail 

commission and increase the quality of ongoing advice. 

However, introducing CAR will also result in substantial compliance costs for advisers 

and providers. It will require more flexible systems that allow different charges for 

advice to be applied and new disclosure to inform consumers of the consequences of 

their actions. In the short-term this requires system changes by providers but in the 

longer term it will impose costs on intermediaries due to increased time with clients 

and answering additional queries. At this stage it is only possible to give a broad 

estimate of these costs if CAR is applied to packaged investment products: 

• Providers: We estimate that the one-off costs for providers would be of the order 

of £60 million, assuming these are spread over five years this means a cost of 

£12 million a year. There would be additional ongoing costs for providers of 

around £5 million a year. The figures reflect the views of providers that CAR 

would impose minimal (if any) additional ongoing costs once one-off systems 

costs had been incurred. 2 

• Intermediaries: Assuming all of today’s IFAs adopt the CAR model, compliance 

costs would be of the order of magnitude of £10 million per annum. 

Overall the costs are estimated as £27 million per year. Potential benefits include £66 

million if all provider bias is removed as well as benefits that have not been quantified 

such as increased trust and demand for advice, increased competition and lower 

charges to consumers. On a Net Present Value basis, we estimate that CAR could 

deliver net benefits in excess of £150 million over the first five years. Further benefits 

that have not been included but that would be expected in the longer term include 

shopping around, increased demand from non-purchasers, reductions in product bias 

and improvements in the quality of ongoing advice. Thus even making cautious 

assumptions regarding the potential benefits from CAR, the benefits seem likely to 

outweigh the costs. 

Over what time period should CAR be introduced? 

The analysis undertaken for this project suggests that the benefits of CAR will grow as 

consumers, intermediaries and providers adjust to the new market environment. This 

is likely to take time and a realistic timescale should be set for both the introduction 

and assessment of the new regime. 

The analysis finds that CAR will bring benefits in terms of perception in the short-term 

but customers are only likely to use the increased freedom of CAR, through negotiation 

and shopping around, as their confidence grows. Given that these products are 

purchased infrequently, this confidence will take time to grow. 

2 It should be noted that we have not collected compliance cost information from investment fund managers. 

7


Intermediaries will only be able to adopt CAR if providers have made the products 

available and where they do, they are likely to initially use similar advice charges to 

today’s commission structure. Only over time will innovative new structures emerge 

and this is likely to correspond to a changing role of nationals, networks and service 

providers. 

Providers will need to change their systems and also how they compete in the market. 

This will also evolve over time. If the regulator provides clear principles and guidance 

regarding how CAR should be implemented, the obligations resulting from TCF should 

encourage providers to compete for intermediaries through offering better products for 

consumers. Alternatively there is a danger that too much flexibility around CAR allows 

competition for intermediaries to focus on characteristics that are not necessarily to 

the benefit of consumers. 

Therefore we conclude that an indicative CBA finds evidence in support of applying 

CAR to the non-tied market, with a phased introduction of CAR starting with packaged 

investment products. Based on the development of products to date and the gradual 

take-up by intermediaries, a 3-5 year time period would be appropriate but will only 

be achievable with regulatory support of CAR style models otherwise it will remain only 

in market niches. Some benefits from CAR will arise in the short-term after 

implementation but changes in consumer behaviour are likely to take longer to emerge 

indicating that a longer period of time will be required to assess whether CAR brings 

about such behavioural change. 

8

ACKNOWLEDGEMENTS 


During the course of this project we spoke to, and gathered data from, a wide variety 

of intermediaries, providers and other industry participants. We would like to thank all 

those who were involved in this research. 

9

CONTENTS 


1.0 Introduction 13 

1.1 The definition of CAR 13 

1.2 The extent of a problem associated to bias 14 

1.3 Methodology and research undertaken 15 

2.0 Impact on demand 16 

2.1 Current understanding and trust 16 

2.2 Impact of CAR on understanding and trust 18 

2.3 Impact of CAR on demand for financial advice and products 21 

2.4 Paying for initial advice over time 22 

2.5 Summary of the impact of CAR on the demand for advice 24 

3.0 Impact on supply 25 

3.1 Current intermediary remuneration 25 

3.2 Changes to intermediary business models resulting from CAR 26 

3.3 The sustainable market for advice 28 

3.4 The role of nationals, networks or service providers 29 

3.5 Summary of the impact of CAR on the supply of advice 31 

4.0 Scope of CAR 32 

4.1 Ongoing trends in remuneration and the use of CAR 32 

4.2 Application to different types of adviser and product 36 

4.3 Summary of the scope of CAR 40 

5.0 Indicative Cost Benefit Analysis 41 

5.1 Impact of CAR 41 

5.2 Summary of the CBA 50 

6.0 The timing implications 51 

REFERENCES 53 

LIST OF TABLES 

Table 1 Compliance costs for providers 48 

LIST OF FIGURES 

Figure 1 Consumer understanding that they pay for advice 16 

Figure 2 Trust in the financial services industry 17 

Figure 3 Consumer reactions to CAR 19 

Figure 4 Impact of CAR on trust 20 

Figure 5 Impact on demand from consumers 21 

Figure 6 Current composition of remuneration 25 

11


Figure 7 Percentage of IFAs reporting increase in remuneration by category 

over last 3 years 26 

Figure 8 Consideration of different methods of remuneration under CAR 27 

Figure 9 Impact on the number of customers receiving advice 28 

Figure 10 Impact on the use of nationals, networks and service providers 30 

Figure 11 Percentage of IFAs reporting that they expect an increase in 

remuneration by category over next 3 years (even in absence of 

changes from RDR) 32 

Figure 12 The use of FGP products and share of revenue 35 

Figure 13 Likely change in use of CAR product in the future 36 

Figure 14 Application of CAR to different advisers 37 

Figure 15 Application of CAR to different products 39 

Figure 16 Changes in customer behaviour due to CAR 42 

Figure 17 The role of ongoing payments of advice 43 

Figure 18 Method of shopping around 46 

12

1.0 

1.1 

INTRODUCTION 


CRA International (CRA) was asked by the ABI to test the impact of the use of Customer 

Agreed Remuneration (CAR) as a method for determining intermediary remuneration for 

financial advice. The project was conducted in the light of proposals made in the FSA’s 

Retail Distribution Review (RDR) regarding possible changes to intermediary regulation. 3 

This research report draws on original consumer, intermediary and provider research to 

consider the following questions: 

1. What would be the impact of CAR on the demand for advice? 

2. What would be the impact of CAR on the supply of advice? 

3. Which products and intermediaries should be included within the CAR model? 

4. Do the benefits of moving to CAR outweigh the costs? 

5. Over what time period should CAR be introduced? 

The report is structured around these five questions. 

The definition of CAR 

In order to investigate the impact of introducing CAR it was necessary to define some of 

its characteristics. For the purposes of this project we explained CAR as having 

implications for both the product and for the process by which advice was given. 4 For 

remuneration to be consistent with CAR we have assumed that it is necessary that: 

• The cost of advice will be separated out from the cost of the product: 

o One part covering the cost of the product; and 

o One part covering the cost of the advice. 

• The cost of the advice will be explained by the adviser at the beginning of the 

process and agreed by the customer. 

• Providers would not pay commission to advisers (but may facilitate payment for 

advice on behalf of the client). 

• The amount consumers pay for the product would be lower because commission is 

not being paid. 

• If a product is purchased, consumers will pay separately for advice. This will be: 

o Either in a single payment at the start; 

o Or as an additional charge over time on the product. 

3 Financial Services Authority (2007), A Review of Retail Distribution, Discussion Paper 07/1. As is common 

market practice, we refer to this as the Retail Distribution Review or RDR. 

4 As set out in the RDR, CAR should be seen not as a different remuneration model but as a different way of 

determining remuneration. 

13


1.2 

It is important to note that although CAR represents a significant change in the way 

financial advice is paid for, it also maintains many of the features of today’s commission 

based model. For example, payment could still be conditional on purchase, advisers could 

still receive their payment up front, and consumers could still spread payments over time. 

In addition, the advice charge would continue to vary according to market forces, but 

would be set by the adviser. 

The extent of a problem associated to bias 

In order to understand the context for the potential introduction of CAR, it is useful to 

examine the extent of problems associated to the current remuneration model. The 

existing model may lead consumers to not trust the industry, and there may also be 

problems of commission bias. 

Although there is a considerable amount of anecdotal evidence on the extent of the 

problem associated to intermediary remuneration, there is a limited amount of published 

research in this area. The first study undertaken for the FSA in 2002, found that although 

commission bias was not prevalent across the whole market there were areas of concern. 5 

In particular, this found statistical evidence of both provider and product bias. This 

reported that: 

• There is evidence of provider bias but only for single premiums products. This was 

estimated as resulting in consumer detriment of £50 million per annum; 

• There is evidence of product bias (ISAs and investment bonds) which resulted in 

consumer detriment of £93 million per annum; and 

• The evidence of a problem of bias was of most concern in the IFA channel. In the tied 

channel, efforts had been made to eliminate the potential for bias resulting from the 

remuneration of advisers. 

The research into the extent of the problem has been repeated, first in 2005 and then 

most recently in early 2007, examining whether the Menu had an impact on the market. 

These found that there was no change in bias between 2002 and 2005 and there had 

been no significant impact of the Menu between June 2005 and June 2006. 

It is also important to note where research has investigated potential problems of bias 

and found no evidence of a problem. In particular, there is no evidence that commission 

or bonus related systems have resulted in a bias to sell compared to fee based advice. 6 

5 “Polarisation: research into the effect of commission based remuneration on advice: A report for the FSA”, CRA 

International (previously Charles River Associates), January 2002. 

6 “Study of intermediary remuneration: A report for the Association of British Insurers”, CRA International 

(previously Charles River Associates), February 2005. 

14

1.3 

Methodology and research undertaken 


In order to investigate the CAR model CRA, in collaboration with ORC International, has 

undertaken a number of distinct pieces of research including: 

• Focus groups: these involved 8 group discussions (consisting of 5 groups of 

consumers who had previously purchased a relevant financial product through a 

financial adviser and 3 non-purchaser groups who had not purchased financial 

products through a financial adviser) to test the reactions of different customers to 

the characteristics of CAR. 7 

• Quantitative consumer survey: this involved 300 face to face interviews with 

purchasers and non-purchasers to test whether the CAR model would change either 

their perception of the industry or their own behaviour. 8 

• Intermediary survey: this involved 100 telephone based interviews with 

Independent Financial Advisers and whole of market advisers regarding their 

current business model and how they would react to using the CAR model. 9 

• Interviews with intermediaries and providers: 15 detailed interviews with current 

providers of CAR products and providers currently developing these products as well 

as 18 interviews with a range of intermediary companies (spanning networks, 

nationals, service providers and intermediary businesses of different sizes as well as 

companies adopting tied and multi-tied models). 

• Intermediary and provider compliance cost survey: this focused on a high level 

assessment of the magnitude of compliance costs of using CAR. 

7 The focus groups were undertaken by ORC international and took place during the weeks of the 6 th and 13 th 

August 2007. 

8 The face to face quantitative surveys were undertaken by ORC international. The fieldwork took place during 

October and November 2007. Non-purchasers were those who had not used a financial adviser to purchase a 

financial product through an adviser, but were considering purchasing a financial product during the following 

12 months. 

9 The intermediary survey was undertaken by ORC international and took place during October 2007. 

15


2.0 

2.1 

2.1.1 

IMPACT ON DEMAND 

In order to look at the impact of CAR on demand, we first need to understand the degree 

to which today’s remuneration system acts as a barrier to consumers participating in the 

market. We then consider whether CAR would be understood by consumers, would 

remove any barriers to participation compared to the existing market and would change 

the behaviour of consumers. 

Current understanding and trust 

In this section we set out the evidence regarding consumers’ existing understanding of 

intermediary remuneration and the impact that this has on their perception of the 

industry. This could have an impact on consumer detriment because a lack of trust could: 

• Discourage consumers from saving when it would be beneficial for them to do so; 

and 

• Result in a higher level of lapse than would otherwise be the case if the consumer 

trusted their adviser or the industry. 

Consumer understanding of the adviser’s remuneration 

As shown in Figure 1, when consumers were asked whether they pay for advice, 50% of 

existing consumers stated that their advisers did not charge for advice. When we consider 

non-purchasers (those who have not purchased financial products through a financial 

adviser), we found a smaller percentage (35%) reporting that they would not expect to 

pay for the services of the adviser. 

Figure 1 Consumer understanding that they pay for advice 

33% 

17% 

The advisers did not charge for advice 

The cost of advice was included in the product charges 

50% 

It was paid through a commission from the product provider 

Source: CRA International based on customer survey of 209 purchasers conducted by ORC International. 

16

2.1.2 


Evidence from the focus groups indicated that consumers (both purchasers and non- 

purchasers) understood the mechanism through which advice is paid for (typically 

recognising that there would be a payment of commission from providers to advisers and 

that this would ultimately feed through to product charges) but were less aware of the 

actual cost of advice. Indeed, 43% of purchasers reported that they were not told the 

cost of their advice by their adviser. 

Trust 

As is seen from Figure 2, around 50% of today’s consumers trust the financial services 

industry. We find that advisers are trusted more than the industry in general and, as 

expected, a substantially larger proportion of consumers trust their own adviser. When we 

examine this information according to the type of adviser used by the consumer, we find 

that trust in consumer’s own advisers is higher in the IFA and insurance sales channel 

than in the banking channel. 

Figure 2 Trust in the financial services industry 

Financial services industry 

Financial advisers in general 

Your financial adviser (all) 

Your financial adviser (bank or 

building society) 

Your financial adviser (insurance 

company or direct sales) 

Your financial adviser (IFA) 

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 

Trust completely Trust slightly Neither trust nor distrust Distrust slightly Distrust completely 


We also find that non-purchasers are less likely than purchasers to trust the financial 

services industry or financial advisers in general. 

Evidence from the focus groups found that there was a clear link between the lack of trust 

in the industry and current remuneration models. For example, it was commonly believed 

that “commission means they will sell you what benefits them the most”. This was most 

17


2.2 

2.2.1 

pronounced for non-purchasers who felt that advisers would “Sell you products you do not 

need for their own gain”. 10 

However, despite this link between trust and remuneration, this does not necessarily 

mean that non-purchasers would become purchasers if they trusted the industry more. 

Even after targeting consumers who are considering purchasing a financial product, we 

found that by far the most important reason for not purchasing previously was not having 

enough money to invest (60% of respondents). Indeed, a lack of trust was only 

mentioned by 10% of non-purchasers as the reason for not purchasing. For this reason, 

it is important to be cautious regarding the impact that improving the perception of 

advice would have on non-purchasers. 

Impact of CAR on understanding and trust 

CAR could bring benefits to consumers if it removes a concern regarding the financial 

services industry or if it provides them with information to make better decisions. In this 

section we examine whether consumers understand CAR at a high level and then whether 

this improves their perception of the industry. Finally, we examine whether this might 

change the way that they behave. 

Understanding CAR 

During our focus group research, we found that the way CAR was explained had an 

important influence on consumer understanding of the concept. In our first focus group 

we included a reference to fees in the description of CAR. 11 We found that customers were 

confused about the concept of CAR believing that it implied a movement towards up-front 

payment of unconditional fees. This provoked a very adverse reaction to CAR reflecting 

the traditional reluctance of the majority of customers to pay a fee for advice. 

In subsequent focus groups, we modified the description of CAR (to that found in section 

1.1) by removing reference to fees. This resulted in a very different reaction to the 

concept which customers viewed favourably and saw as easy to understand. This ease of 

understanding was also supported by evidence from the quantitative survey where, using 

the same description of CAR, we found that: 

• 84% agreed that “the concept was easy for me to understand”; and 

• 56% disagreed with the statement that “the complexity of this approach would put 

me off seeking advice”. 

Intermediaries were also asked about what they thought the likely impact would be from 

their clients. Intermediaries were concerned that this would confuse customers, with over 

10 This is consistent with the evidence from “Consumer confidence in the financial services industry, Consumer 

Panel Research Paper 2/2005”, Financial Services Consumer Panel, 2005, which finds that more than half of 

consumers think that financial services firms sell the products that pay the most commission. 

11 The material used stated that customers will have the option to pay for advice through an upfront fee or by 

paying through charges on a product bought. 

18

2.2.2 


70% of intermediaries believing that CAR would confuse consumers although, as noted 

above, neither the consumer survey nor the focus groups support this view. 12 

Changes in trust due to CAR 

Two of the strongest positive reactions to the concept of CAR during the focus groups 

were that: 

• Charging for advice would become more transparent; and 

• Commission would no longer be paid by the provider. 

In turn these were thought likely to bring behavioural changes and benefits. First, 

because consumers thought that charging for advice would become more transparent, 

this would mean that customers would be clear about the cost of advice and this would 

lead advisers to become more competitive in their pricing. Second, the removal of the 

provider from setting commission rates was seen as positive because this would mitigate 

some of the risks of bias. However, it is important to note that some participants in the 

focus groups believed that providers could reintroduce bias by another route – this issue 

was of particular concern for non-purchasers. 

These aspects of CAR were also identified during the quantitative research as shown in 

Figure 3. 

Figure 3 Consumer reactions to CAR 

This approach would mean 

customers would be clear 

on exactly how much they 

were paying for advice 

Advisers would have to 

become more competitive 

in their pricing for financial 

advice 

Providers would find 

another way to influence 

advisers 

0% 20% 40% 60% 80% 100% 

Agree strongly Agree slightly Neither agree nor disagree Disagree slightly Disagree strongly 


When considering non-purchasers, we found that they were slightly less positive about 

CAR in respect of the first two questions in Figure 3 and slightly more likely to state that 

12 It is possible that the prediction of intermediaries could become self-fulfilling with intermediaries explaining CAR 

such that it is confusing. 

19


providers would find another way to influence advisers (76% of non purchasers agreed 

with this compared to 66% for purchasers). 13 

These positive reactions are linked to the impact that CAR has in terms of increasing trust 

in the industry and advisers as shown in Figure 4 below. 

Figure 4 Impact of CAR on trust 

Change in trust in the 

industry 

Change in trust in 

financial advisers in 

general 

Change in 

trust in 

own 

adviser 

Purchaser 

Non-purchaser 

Purchaser 

Non-purchaser 

Purchaser 

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 

Increase greatly Increase slightly Stay about the same Decrease slightly Decrease greatly 

Note: Note that the change in trust for the customer’s own adviser is only relevant for existing purchasers. 

Source: CRA International based on customer survey of 209 purchasers and 103 non-purchasers conducted by 

ORC International. 

As is clear from Figure 4, CAR would lead to an increase in trust and this is more 

significant for purchasers than for non-purchasers. The improvement in trust would be 

greater for the whole industry than for financial advisers generally which would be greater 

than for consumers’ own advisers. In part this is likely to be because consumers already 

trust their adviser more than advisers generally who they trust more than the industry. 

Hence there is less scope to increase trust in their own adviser who is already trusted. 

The increase in trust from CAR of both the industry and financial advisers in general is 

greatest among those who use IFAs followed by those who use banks followed by those 

who use an insurance company direct salesman. 

Those who had previously been put off buying financial products because they did not 

trust financial services providers (10%) or were put off by the need to get financial advice 

(11%) - a total of 21% of non-purchasers - were slightly more likely than other non- 

purchasers to say that CAR led to an increase in their trust of financial advisers. 

In general, intermediaries are somewhat more sceptical than consumers that a movement 

to CAR would bring benefits. Overall, around 30% of intermediaries believe that the 

separation of advice and manufacturer charges would reduce the perception of bias and 

13 The percentages stated are based on a sample that excludes those who said “don’t know”. 

20


less than 25% thought this would increase trust. However, this needs to be put in the 

context that only 50% of intermediaries believe there is a problem of perception resulting 

from commission based remuneration. 

2.3 Impact of CAR on demand for financial advice and products 

There are a number of different ways in which customer behaviour could change in 

response to CAR including shopping around and requesting an explanation of the service 

that customers receive – these are examined in section 5.1; here we focus on the impact 

on the quantity demanded. 

Around 50% of purchasers agreed that CAR would make them more likely to follow their 

adviser’s recommendation (less than 20% disagreed with this statement). These 

consumers were then asked what course of action they would take in response with the 

results presented in Figure 5. 

Figure 5 Impact on demand from consumers 

35% 

30% 

25% 

20% 

15% 

10% 

5% 

0% 

Invest more Visit your adviser more often 

Note: This result is based on the 102 purchasers who state that CAR would make them more likely to follow their 

adviser’s recommendation. 

Source: CRA International based on survey of 209 purchasers conducted by ORC International. 

As is clear from Figure 5, 10% of those who would be more likely to follow their adviser’s 

recommendation would invest more, which represents 5% of all purchasers. Similarly, 

over 30% of purchasers who would be more likely to follow their adviser’s 

recommendation (15% of all purchasers) state that they would want to visit their adviser 

more often. These reactions suggest that there will be an increase in demand for both 

products and advice. Whether such demand for advice would actually be realised will 

depend on the reactions of intermediaries to CAR which is considered in the next chapter 

which examines the supply of advice. 

21


2.3.1 

2.4 

Among non-purchasers, 37% agree that CAR would increase the likelihood that they 

would use an adviser. In practice, however, these individuals would only learn about CAR 

after they have visited an adviser or indirectly through word of mouth. In addition, only 

10% of non-purchasers had not used an adviser before because they did not trust them. 

For this reason we do not assume that there will be an increase in demand from non- 

purchasers in the short-term, although it may increase demand in the medium-term. 

Potential switch to direct purchase 

If CAR is successful it will result in consumers understanding that advice is not free, but 

rather that advice has implications for the charges they pay. There is, therefore, a risk 

that a group of consumers will take advice but then choose to purchase directly from the 

provider. Indeed, 47% of purchasers agree that they would be more likely to take advice 

and then buy the product direct from the provider. However, evidence from focus groups 

indicated a recognition that there would be a time cost involved in doing this and although 

individuals believed others might take this course of action, those who trusted their 

adviser would not follow this approach. Furthermore, this course of action is already open 

to consumers at present and many consumers still prefer to use their adviser. 

In reality, a switch to direct is more likely to occur if it is possible to receive advice for 

free and to pay a substantially lower price when buying direct. If this becomes a 

significant trend it is likely that intermediaries would change the way they charge for 

advice to counter such a challenge. 

Paying for initial advice over time 

How much the consumer will have to pay upfront will have a significant impact on the 

actual level of demand. Evidence from interviews with intermediaries indicates that many 

consumers are reluctant to pay a significant cost for advice on an upfront basis. This is 

consistent with the negative reaction to fees that was found in the focus groups. 

Where consumers are making small investments or are using regular premium products, 

it would not be possible to deduct the cost of advice from the initial investment without 

creating a “debt” which would be unattractive for many consumers. Instead, consumers 

prefer to pay for advice over time. However, if payments for initial advice occur over 

time, this raises two issues: 

• What happens if the customer lapses? 

• Can providers pay the adviser in advance of the money being collected from the 

Lapse 

customer? 

Under current commission based advice, if customers lapse their product during the early 

years, then providers will typically claw-back some of the indemnity commission from the 

adviser and hence the adviser suffers from lapse. It is less clear what the impacts would 

be under CAR where there is mixed evidence: 

22


• Many consumers recognise that if they have received initial advice then they should 

pay for it, with 49% agreeing that the consumer should pay at least a proportion of 

the outstanding advice charges. 

• Other consumers believe that if they have lapsed then they should not make any 

further payments (40%) because they have opted out of the product. Focus group 

research indicated that some consumers believe that if they lapse it would indicate 

that the original advice may not have been very good. 

• Most intermediaries interviewed stated that they would not take any action to 

recover the payment from the consumer because in many cases they would have 

ceased to be a client if they had lapsed the product. 

• A small number of intermediaries interviewed stated that they would expect the 

client to pay and would invoice them for this amount because they had received the 

advice and this would be clear in the terms of business agreement that they have 

with their clients. Evidence from the intermediary survey found that if advisers 

were responsible for collecting the outstanding amount that this would, however, 

discourage them from serving more customers (74%). 

• Alternatively, if customers had to pay the initial advice through product charges if 

they lapsed, intermediaries were concerned that this would lead to fewer sales 

(61%), put consumers off using advice (48%) and lead to more complaints (44%). 

It therefore seems likely that different propositions will be attractive to different 

consumers and intermediaries and there is not a single way of applying CAR as long as 

the consumer is clear about whether they are liable for the cost of the initial advice if they 

lapse. It is possible that CAR leads to the cost of lapse falling on consumers to a greater 

degree than today. 

Factoring 

When consumers pay for advice over time, providers could offer “factoring” services 

whereby they change the timing of the payment on behalf of the adviser i.e. where the 

consumer pays for initial advice over time but the adviser receives a payment for this 

advice upfront. 

There is, however, considerable scepticism from a significant minority of consumers 

regarding this approach where 33% of consumers believe that this would lead trust to 

decrease (with 56% stating that trust would remain the same). Evidence from the focus 

groups also indicated that the use of factoring could substantially reduce the gains from 

CAR and in particular, would bring back a perception of provider bias. The use of an 

industry-wide factoring rate was found to somewhat reduce concerns for 61% of these 

consumers although 19% stated that they would still have a great deal of concerns about 

factoring even with standard industry rules. 

23


2.5 Summary of the impact of CAR on the demand for advice 

In summary, CAR could result in significant changes to the demand for advice and is seen 

favourably by consumers, improving their perception of the industry and bringing some 

changes in their behaviour: 

• Consumers appear to find the concept straightforward to understand and it would 

remove the confusion regarding advice being free and prompt consumers to ask 

their adviser what services they are receiving for the advice charge. 

• Consumers value the transparency of CAR which would increase the degree to 

which consumers trust the industry and financial advisers in general although this is 

unlikely to lead non-purchasers to become purchasers. 

• CAR would make around half of consumers more likely to follow their adviser’s 

recommendations leading to around 5% of existing customers investing more 

money and 15% of them visiting their adviser more often. 

• Among non-purchasers, although 37% agree that CAR would increase the likelihood 

that they would use an adviser, as they would only become aware of this when 

using a financial adviser and only 10% had previously stated that they had not used 

an adviser before because they did not trust them we do not assume that there will 

be an increase in demand from non-purchasers in the short-term, although it may 

increase demand in the medium-term. 

• There is a risk that a group of consumers will take advice but then choose to 

purchase directly from the provider. This is more likely to occur if it is possible to 

receive advice for free and to pay a substantially lower price when buying direct. 

When considering how CAR could be applied in terms of the timing of payments, there are 

particular difficulties for small investments and regular premium products. In these cases 

it is not possible to deduct the cost of advice from the initial investment and hence advice 

may need to be paid for over time. 

• If the risk of lapse falls predominantly on the customer this could reduce their 

willingness to seek advice, but if risk falls on the advisers, this may discourage 

them from serving this part of the market. 

• If advice is paid for over time, factoring could be used to match intermediary 

remuneration to their costs. However, clients are suspicious that this provides a 

way for providers to influence advisers. 

24

3.0 

3.1 

IMPACT ON SUPPLY 


The previous chapter highlighted that, from the consumers’ perspective, CAR would 

increase the demand for advice. In this chapter we consider whether CAR would mean 

that it is economic for advisers and providers to serve this market by examining the 

implications of CAR for the supply of advice. We start by considering existing intermediary 

remuneration and how this has been changing. 

Current intermediary remuneration 

As is clear from Figure 6, around 22% of intermediary income is through fees, paid 

directly by the client or through commission offset. This is substantially higher than the 

12% that was commonly found in previous surveys. 14 This may be explained by including 

in our definition both fees paid straight from the client (which is about 12%) and those 

paid on a commission offset basis. 

Figure 6 Current composition of remuneration 

% of remuneration 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

Independent IFA (nonnetwork) 

National Financial Adviser 

(IFA) firm 

Network member IFA All IFAs 

Fees using commission offset Fees without commission offset 

Initial commission/related to premium Trail commission/related to FUM 

Source: CRA International based on survey of 101 intermediaries conducted by ORC International. 

As well as understanding the way that IFAs are currently paid, it is useful to examine 

whether this has changed over the last few years (see Figure 7 below). 

14 “Study of intermediary remuneration: A report for the Association of British Insurers”, CRA International 

(previously Charles River Associates), February 2005 

25


3.2 

Figure 7 Percentage of IFAs reporting increase in remuneration by category 

% of IFAs reporting increase over last 3 years 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

over last 3 years 



(IFA) firm 





It is clear that all types of intermediary have seen an increase in fee based business 

(although fees are less important for network members than other types of IFA). CRA’s 

previous analysis conducted in early 2007 did not identify a trend towards fee based 

advice which may indicate that the size of the trend has been small. 15 

The more dramatic result is that all types of intermediary report an increase in the use of 

trail commission. 16 This is consistent with most intermediaries reporting a reduction in 

their reliance on initial commission. The trend to trail commission is consistent with 

previous research. 17 

Changes to intermediary business models resulting from CAR 

The introduction of CAR should result in advisers setting their charges for advice rather 

than these being set by providers through commission payments. This should mean that 

the charge for advice will be the same whichever provider is recommended. 

15 “An Empirical Investigation into the Effects of the Menu: A report for the FSA”, CRA International, May 2007. 

This only looked at the percentage of income made up by fees of advisers who were themselves using fees, 

which had been relatively stable at around 18%, so this is not strictly comparable to the analysis above. It 

should be noted that Figure 7above only identifies a movement towards fees rather than the size of this trend. 

16 For both fee based advice and trail commission, the great majority of the rest of respondents reported that 

these categories had stayed the same, with very few reporting a reduction in either of these. 

17 “An Empirical Investigation into the Effects of the Menu: A report for the FSA”, CRA International, May 2007. In 

recent research investigating the impact of the Menu we examined the proportion of business written on Initialonly 

terms for each of the product categories. This showed that single premium personal pensions business has 

been characterised by a sharp fall in the proportion of new business written on Initial-only terms, while regular 

premium personal pensions business has been characterised by a dramatic increase in the proportion written on 

Initial-only terms. There was little change in other products. Given the trend from regular premium to single 

premium savings, this is consistent with an increase in trail over the last three year. 

26


The use of CAR brings considerable freedom for advisers to decide the structure of their 

charges. A number of possible models were suggested during the interviews: 

• The intermediary company could set a single rate for all advisers in the company or 

give advisers freedom to determine their own rate; or 

• Advisers could set a charge based on the activity they do, by individual type of 

product, or by setting charges for classes of similar products. 

The evidence from the survey of intermediaries regarding the different methods of 

remuneration that they would consider is provided in Figure 8 below. 

Figure 8 Consideration of different methods of remuneration under CAR 

% of intermediaries 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

Fixed fees added to the 

manufacturer's product 

charges over a fixed 

period of time 

Fees based on hourly 

rate and taken out of the 

initial investment 

Use the same 

commission rates as on 

traditional products 

today 


Simple pricing structures 

that do not vary by 

products 

Evidence from intermediary interviews broadly found that they would use the same advice 

charge for different providers of the same product. That is they would have the same 

charge for investment bonds whichever the provider. However, unless there are principles 

in place that require intermediaries not to discriminate between different providers then 

some intermediaries may choose to have different advice charges for different providers. 

This could lead to provider bias re-emerging. Most interviewees assumed that differential 

advice charges by provider would not be within the “spirit” of CAR, but some questioned 

whether it would still be possible. 

Interview evidence suggested that where intermediaries are using products that already 

split out the cost of advice from the cost of the product, they have typically used similar 

structures for their advice charges to those found for commission on traditional products. 

However, a small number have moved away from this approach and evidence in Figure 8 

shows that there is some consideration of using pricing structures that do not vary by 

products. In as far as intermediaries use such structures, this would reduce any concerns 

about product bias. Additional responses from intermediaries indicated that the most 

likely areas of simplification would be within investment products (73%) and within 

27


pension products (63%). There was slightly less support for simplifying structures so that 

the same amount was charged for investment products as for pension products. 

3.3 The sustainable market for advice 

Commission based payments result in consumers with large investments paying more for 

advice than those with a low investment (since commission is structured as a percentage 

of the value of the investment). However, rebating of commission does occur for large 

investments, reducing the extent of cross-subsidy. 

One of the issues associated with CAR is that if the cost of advice is more transparent 

(which consumers believe it will be under CAR), then the cross-subsidy associated to the 

current remuneration structure may not be sustainable. This could result in customers 

with small investments no longer being economic to serve. 

Figure 9 Impact on the number of customers receiving advice 


70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

No, it would make no difference Yes, the number would decrease Yes, the number would increase 

Impact on consumers receiving advice Impact on consumers receiving ongoing advice 


Indeed, Figure 9 highlights that most intermediaries believe that one of the results of CAR 

is that the number of customers receiving advice would fall. Furthermore, they believe 

that this effect will be greatest for those clients receiving ongoing advice. Very few (less 

than 10%) could imagine CAR increasing the number of customers getting advice. 

Advisers also believed that this would have the biggest effect on serving low income 

consumers. 

28


This evidence suggests that low income consumers might be at risk of not being served 

under CAR. However, there are a number of reasons to be slightly sceptical that the 

removal of cross-subsidies will lead to the removal of advice to low income consumers 

including that: 

• Advisers could increase their profitability today by not serving these consumers. 

Indeed, in a number of interviews, intermediaries suggested that this had already 

occurred; 

• Price discrimination already occurs through active consumers requesting rebates, 

although CAR will encourage a further move in this direction; and 

• Advisers already choose to serve some clients that are not economic to serve in the 

short-term because they believe that they will be economic to serve over the longer 

term. 

Thus although there is a risk of the cross-subsidy being removed and consumers with 

small investments no longer being served, other reasons suggest that CAR is unlikely to 

have a dramatic effect on the supply of advice. However, this does indicate that CAR is 

unlikely to reverse the trend for IFAs to serve fewer lower value clients. 

3.4 The role of nationals, networks or service providers 

The impact of CAR could also change the relationships between intermediaries. Large 

numbers of intermediaries are members of nationals, networks or service providers. 

These offer individual IFAs a range of services including assistance with compliance, 

advice on business development, and the benefits of being part of a larger group that can 

exploit bargaining power with the providers. The latter has typically been seen through 

enhanced commission rates. Evidence provided by interviewees suggested that this was 

the second most important reason for using a network or service provider after 

compliance related issues. 

For those networks or service providers for whom the negotiation of higher commission 

rates represents a key element of why individual IFAs join them, a movement to CAR 

potentially leads to the loss of this comparative advantage. CAR means that advisers, 

rather than the provider, will set the charge for advice, therefore the negotiating power of 

the intermediary with providers cannot directly be used to influence the amount of the 

advice charge. To the extent that members joined to access enhanced commission this 

could lead to a loss of membership. 

This could result in the market changing in a number of ways: 

• It could lead to intermediaries choosing to leave nationals, networks or service 

providers if they joined them in order to receive enhanced commission; or 

• Intermediaries might remain members but focus on the compliance services being 

provided to them. 

Figure 10 below provides details on whether intermediaries would change their 

membership of nationals, networks and service providers. 

29


Figure 10 Impact on the use of nationals, networks and service providers 


100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

Nationals Network members Non-network/national IFAs 

Continue to use a network, national or service provider 

Join a network, national or service provider 

Would not use a network, national or service provider 


Figure 10 shows that the application of CAR could have a significant impact on the 

incentive for intermediaries to be a member of a network or national or to use a service 

provider. Although based on a small sample, this would suggest that national IFAs are 

more likely to consider changing their membership than networks. 

Some service providers are already moving away from a model where the price that they 

are paid for their services is based on a proportion of the commission earned, and 

towards a monthly fee according to the services that they receive. It seems that those 

service providers who have acted in this way will be less affected by changes in 

remuneration levels or structures caused by CAR. 

Alternatively, networks, nationals and service providers could use their bargaining power 

to negotiate better terms from the manufacturers for the consumer i.e. lower 

manufacturing prices. 

In well functioning markets, bargaining power of intermediaries or distributors is used in 

order to offer better value products or services to customers. Thus as well as competition 

over administration and service, we would expect to see bargaining power leading to 

some intermediaries being able to obtain products from providers at lower manufacturing 

prices than other intermediaries. Both the lower manufacturing price and the cost of 

advice would be disclosed to clients hence, if competition works well, large intermediaries 

would be able to use their buying power to the direct advantage of their clients. 

Discussions with large intermediaries indicate that this is the direction that competitive 

forces would be expected to move. However, interviews with providers indicate 

reluctance to offer different products with different underlying prices. In some firms it 

appears as though the setting of manufacturing prices is currently undertaken separately 

from the negotiation of commission levels with intermediaries and therefore negotiation of 

manufacturing prices has not been contemplated in the past. 

30


Nonetheless, competition focused on lowering manufacturing prices through certain 

intermediary channels brings clear benefits to consumers. If consumers are sensitive to 

both the manufacturing price and to the cost of advice this would be expected to lead to 

firms who are able to negotiate the best prices growing at the expense of other firms. 

Intermediaries can benefit from this either through an increased market share, or 

potentially through increasing the cost of advice to reflect a share of the benefits they 

have achieved on the cost of the product. 

It is also possible that they seek to benefit through other forms of payment from the 

provider. This will depend on the degree to which intermediaries can negotiate payments 

from the provider beyond those agreed with the consumers. We return to this issue in 

section 5.1. 

3.5 Summary of the impact of CAR on the supply of advice 

In summary, due to the changes in demand identified in the last chapter and the freedom 

that CAR offers intermediaries to determine the advice charge, this will have implications 

for the business models that intermediaries use and the markets they serve: 

• There are legitimate concerns that this will reduce the access to advice for investors 

with a small amount to invest. However given that price discrimination already 

occurs and advisers will continue to have an interest in cultivating new customers 

the magnitude of this effect might be small; and 

• It could change the role of nationals, networks and service providers. If CAR is 

successful, these organisations will use their bargaining power to negotiate better 

terms for the consumer and use this to market their services to consumers. 

31


4.0 

4.1 

SCOPE OF CAR 

At this stage, there are a wide variety of options regarding the way that CAR could be 

developed. Indeed, the ABI asked us to consider a range of scenarios including: 

• The application of CAR to only the IFA channel or whether it should also be applied 

to multi-tied and tied advisers; and 

• The application to particular product types. In the RDR the use of CAR was only 

suggested for retail investment products but we were asked to consider if it should 

also be applied to protection products. 

Before considering the scope of where CAR should apply, we examine trends in 

remuneration to understand whether these address the problems in the market and 

whether advisers are already using approaches consistent with the CAR model or will do 

so in the future. 

Ongoing trends in remuneration and the use of CAR 

It is possible that the problems associated to current commission structures are resolved 

by increased use of other forms of remuneration e.g. fees. Few intermediaries believe 

that payment by fees or trail commission will decrease but a significant percentage 

believe that they will continue to grow, as shown in Figure 11 below. Network members 

are the least convinced that fees will increase. 

Figure 11 Percentage of IFAs reporting that they expect an increase in 

% of IFAs reporting increase over the next 3 years 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

remuneration by category over next 3 years (even in absence of 

changes from RDR) 



(IFA) firm 





32

4.1.1 


These results are consistent with interviews where IFAs report that there is pressure to 

increase the percentage of their remuneration paid on an ongoing basis. This results 

from: 

• A desire to build value in their business, so they can sell the business when they 

retire; and 

• Pressure from shareholders in businesses that have been acquired. 

This has resulted in internal changes within intermediary businesses to encourage this 

transition, for example, rewarding advisers in their remuneration for trail commission, 

where this was not previously the case. 

However, based on the slow speed of change in the structure of remuneration to date, a 

large change in the composition of remuneration is unlikely to occur quickly. 

The use of CAR products in the market today and in the future 

In order to understand the products on the market today it is useful to set out the 

terminology that is currently used. The great majority of providers offering packaged 

investment products state that they offer “Factory Gate Pricing” (FGP). However, the 

definition of FGP can vary quite significantly from provider to provider. In particular there 

are differences regarding: 

• Whether this involves a net manufacturer price being disclosed; 

• Whether there is complete flexibility to use any form of charges for advice or 

whether flexibility is provided through a choice of different commission options; and 

• The involvement of the consumer and the resulting disclosure to the client. 

The definition of CAR that we set out in section 1.1 indicates that CAR requires the 

intermediary, rather than the provider, to set the cost of advice and for this to be agreed 

by the customer. Hence all CAR products would be considered to be FGP products but not 

all FGP products would necessarily be consistent with CAR. 

According to interviews with providers, the development of FGP products has been taking 

place over the last ten years but has accelerated considerably over the last two years. 

Providers have introduced FGP for different product categories and have adopted different 

strategies regarding the use of commission loaded products. Some providers have 

phased out the use of commission loaded products (or are aiming to do so) in order to 

only offer FGP products, other providers have chosen to run two parallel products, and yet 

others are favouring the FGP product but retaining their existing products as well. 

However, all providers have focused their initial effort on large single premium products 

and, when launching FGP products, have tended to target the existing fee based market 

as the easiest part of the market to penetrate with these products. Only once the product 

has been accepted in this segment have providers generally widened the group of 

intermediaries to whom they are marketing. 

33


The FGP products themselves vary in some significant ways: 

• The risk associated with lapse or surrender: For customers with large single 

premium products, the adviser can use an FGP product and be paid upfront directly 

from the client’s investment. However, where the adviser’s charge is taken over a 

number of years, providers have adopted different positions regarding whether this 

is automatically deducted from the client’s fund, or whether the risk of lapse falls on 

the adviser who may have their remuneration clawed-back (if it was paid upfront by 

the provider). 

• The use of factoring: Where providers are allowing the advice charge to be paid 

over time, this normally involves a relatively short initial period of around two 

years, although in some cases the advice charge is paid over a period of six years. 

There is significant variation in the way that factoring arises with some providers 

offering traditional market interest rates and others not applying an interest rate, 

and still others not providing factoring at all. 

In addition, providers are taking different positions regarding the role of “decency limits” 

whereby they will take some form of action if very high levels of advice charges are 

applied to the products. All the providers we interviewed have set some form of decency 

limit which were usually justified in terms of treating customers fairly and providing a 

good value product overall. 18 

Finally, alongside the development of FGP products, there has been recent growth in the 

wrap market. This is likely to play an important role both in the development of FGP 

products and also in the use of approaches which are consistent with CAR. Wrap products 

typically split out product charges (such as the underlying annual management charge), 

platform charges (such as administration fees) and advice charges. Thus the growth of 

wraps means that there is a pressure to develop transparent FGP products where the 

product charge can be separately identified. 

Turning to the use of FGP by intermediaries, it is clear that many IFAs already have 

experience of FGP products (see Figure 12). 

18 Interviews with providers suggested that there were a small number of occasions when decency limits had been 

breached. Note that some providers have set maximum levels of commission that can be taken at levels 

equivalent to the commission that would typically be paid on commission loaded products. Where this has been 

done there is evidence that intermediaries have often chosen to apply advice charges at this maximum level. 

However, since this maximum is in line with commission on traditional products we do not refer to this as a 

decency limit. 

34

Figure 12 The use of FGP products and share of revenue 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 



(IFA) firm 

Currently use FGP products % of revenue 




As is clear from Figure 12, FGP products represent a small proportion of revenue for 

network members in particular. Discussions with networks and nationals supported this 

result. 

Further, as discussed in section 3.2, interviews with both intermediaries and providers 

indicated that where FGP products are being used, intermediaries have typically used the 

same commission structures and levels as would be seen on traditional commission 

loaded products. 

Turning to the future we asked IFAs whether they expected to be using CAR products in 

the future. As shown in Figure 13 below, on average IFAs thought that there would be an 

increase in the use of CAR. This appears true across different types of IFA, although 

networks are clearly less confident this will occur. 

As might be expected, there is a strong correlation between the current usage of CAR 

style products (in Figure 12 above) and the view that these will increase in the future (in 

Figure 13 below). Those already using a CAR style product were much more optimistic 

that this would increase in the future. 

35


Figure 13 Likely change in use of CAR product in the future 

% of IFAs 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 



(IFA) firm 

Increase use of CAR No increase 



However it is clear that the use of CAR will vary across the market. In particular, the 

take-up by networks and nationals will only occur slowly over time. For example, 

networks questioned why their advisers would choose to use CAR when they are satisfied 

with the existing traditional products. 

Based on current trends, CAR will not be commonly used in the non-IFA segment. There 

are some examples of particular providers using a CAR approach for insurance direct sales 

forces, however none of the banks currently use this approach and neither does there 

appear to be any incentive suggesting that they would do so in the future. 

There is also evidence of increasing application of CAR to different products, although this 

will continue to focus on single premium products. In particular, there is little, if any, 

evidence suggesting that the use of CAR and FGP products in the protection market will 

develop in the medium-term in the absence of regulatory intervention. 

It is therefore clear that ongoing trends will not, by themselves, resolve the problems 

identified in the market. Although the use of CAR products will grow, they will only be 

used in particular market niches. In the next section, we consider where the application of 

CAR may be appropriate. 

4.2 Application to different types of adviser and product 

We now turn to consider where CAR could be applied in the future. Evidence from 

consumers reveals that, given the complexities of the retail financial services market, 

consumers would favour a single system that applied to all products and all types of 

adviser. However, there are convincing arguments that suggest CAR should be limited to 

particular markets which are explored in the sections below. 

36

4.2.1 

Application to different types of adviser 


Both consumers and intermediaries were asked which types of advisers they thought that 

CAR was most appropriate to and there was consistency in the ordering of their responses 

as shown in Figure 14 below. 

Figure 14 Application of CAR to different advisers 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

IFA Multi-tied An adviser based in a bank 

or building society 

Intermediaries Consumers 

An insurance company 

adviser or direct sales 

person 

Note: The results are based on spontaneous responses. The concept of multi-tied advisers was not discussed in 

the consumer survey; in addition no differentiation was identified between different types of tied advisers in the 

intermediary survey. 

Source: CRA International based on surveys of 209 consumer purchasers and 101 intermediaries conducted by 


Figure 14 shows that there is general support for CAR being applied in the IFA sector, 

with less support for CAR being applied in the tied sector especially among consumers. 

Consumers did not identify as a distinct group those advisers operating as a separate 

business with a single tie. Hence evidence regarding consumer reactions to these 

advisers is not available and strong conclusions can not be drawn for this segment. 

The focus groups identified that most consumers found that the application of CAR in the 

tied sector was difficult to understand. Although they were primarily thinking of the 

banking channel, it was clear that consumers considered individuals in this channel to be 

“salesmen” and consumers struggled with the concept of revealing the cost of advice or 

cost of sales in that channel. However, even when the distinction between banks and 

insurance company advisers was made explicit in the quantitative survey we found a 

similar result. As is clear from the figure above, consumers considered CAR even less 

important for tied advisers in the insurance channel than the banking channel. 

37


4.2.2 

Even if CAR would not be valuable in its own right in the tied channel, theoretically it is 

possible that some form of disclosure may be necessary to prevent a regulatory failure 

i.e. the application of CAR in the IFA channel might encourage consumers to use other 

channels where advice is perceived to be free. However, such a regulatory failure is 

unlikely because: 

• It is relatively uncommon for consumers to shop around by comparing different 

advisers (around 10% of consumers); and 

• The group that considers both tied and independent advisers is a small minority of 

this group (less than 20% of those shopping around). 

One of the advantages of CAR is that consumers will be made aware that the cost of 

advice has implications for the price of the overall product i.e. that advice is not free. 

Despite negotiation over the cost of advice being unlikely in the short run in any channel, 

it seems unlikely that such a negotiation could arise in most tied intermediaries. 

Furthermore, the incentives faced by advisers in the tied channel are not directly related 

to the cost of advice that is, or would be, disclosed. Hence CAR would not, in itself, 

remove the potential for bias. Where advisers operate as a separate business with a 

single tie, advisers may face remuneration structures similar to those of IFAs and hence 

the disclosure of this remuneration would be related to the incentives faced by advisers. 

However, since these advisers only offer a single tie, there is limited ability for disclosure 

to reduce provider bias. 

Finally, in the interviews tied providers reported that it was difficult to differentiate 

between consumers on the basis of whether they wanted ongoing advice. This is because 

the reputation of the company as a provider is inherently linked to its behaviour as an 

adviser. In particular, tied providers indicated that reputational concerns would prevent 

them from refusing ongoing advice to a customer and therefore such ongoing advice 

needed to be included in the overall cost of the product and advice package. Thus there 

is reason to be sceptical that CAR can bring clarity to ongoing advice in the tied channel. 

We therefore do not recommend making it compulsory to use CAR in the tied channel. 

Instead, providers could be encouraged to ensure the incentives faced by tied advisers 

remove any potential for bias. 

Application to different types of product 

Again there is considerable agreement between intermediaries and consumers regarding 

the ordering of the types of products that CAR should be applied to, with investments and 

pensions widely supported and CAR considered less relevant for protection products 

(especially by intermediaries). 

38

Figure 15 Application of CAR to different products 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 


Investments Pensions Protection 

Intermediaries Consumers 

Note: Note that the consumer results include in each product category 33% of consumers who think that CAR 

should apply on all types of products. 

Source: CRA International based on surveys of 209 consumer purchasers and 101 intermediaries conducted by 


There is an argument that the application of CAR in the investment fund sector would be 

difficult. Based on preliminary investigations, we understand that while negotiation and 

differential charges would frequently arise for the initial charge (linked to the payment for 

initial advice), there is a standard level of trail commission that is commonly paid which is 

taken out of the annual management charge. All units within a particular share class 

charge the same annual management charge. 

It would be possible to apply CAR to investment funds by creating separate share classes 

(we understand that most fund mangers operating in the UK already set up a separate UK 

share class in order to gain distributor status for tax purposes). Alternatively, it may be 

necessary for advisers to be given permission to cancel the units of their clients which we 

understand would involve changes compared to the current position. Although the costs 

would need to be estimated, this problem does not appear insurmountable. 

More generally, there are, however, some strong arguments indicating that CAR is more 

appropriate in some parts of the market than in others. 

The mechanics of applying CAR 

The application of the CAR model for large single premium products is simpler than 

regular premium products. 

Given that there are fixed costs in providing advice, the advice cost will be proportionally 

larger for smaller contributions. Deducting these charges from initial contributions may 

make these products appear very unattractive to the consumer (or seen as inappropriate 

from a TCF perspective) in the short-term. While this applies mainly to regular premium 

products it also indicates that there may be a minimum value of investment for single 

39


premium products that would not naturally move towards a CAR basis for the same 

reason. 

Hence, regular premium products are likely to result in the advice charge being paid over 

time introducing issues to do with whether consumers or advisers are liable for the cost of 

advice if the consumer lapses and introducing the opportunity for factoring. Although this 

may be necessary, consumers are suspicious of factoring and this will be a barrier to 

increasing trust. 

Evidence regarding provider bias 

Previous research by CRA found that provider bias is most problematic for single premium 

products. The first study undertaken for the FSA in 2002, found that although commission 

bias was not prevalent across the whole market there were areas of concern, in particular 

there was evidence of provider bias for single premiums products. Consistent results were 

found in the later research conducted in 2005 and 2007. 

4.3 Summary of the scope of CAR 

Given the differences between the channels and the reaction of consumers, the benefits 

of applying CAR to the tied segment appear relatively small. We therefore do not 

recommend making it compulsory to use CAR in the tied channel. Instead, providers 

could be encouraged to ensure the incentives faced by tied advisers remove any potential 

for product bias. 

Currently, the great majority of retail investment products are structured as single 

premiums. However, given the potential for substitution between regular and single 

premiums, our evidence supports the application of CAR to all retail investment products 

irrespective of the premium type. The difficulty of applying CAR to small regular premium 

products without factoring, however, suggests that caution is required regarding the 

potential application to protection products. 

40

5.0 

5.1 

5.1.1 

INDICATIVE COST BENEFIT ANALYSIS 


To determine whether CAR would result in economic benefits that exceed the costs of 

implementation, we need to compare the market outcome following the introduction of 

CAR with what would happen in the absence of CAR being encouraged (the ongoing 

trends in the use of CAR were examined in section 4.1). In this chapter we therefore 

focus on the impact of encouraging CAR on: 

• The quantity of advice and products purchased; 

• Quality; 

• The variety of advice propositions and products on the market; 

• The efficiency of competition; and 

• Compliance costs. 

Impact of CAR 

To determine whether encouraging CAR would yield net economic benefits, we need to 

consider the impact on the market and the corresponding compliance costs. 

Quantity 

The impact on the size of the advice market is determined by the impact on demand 

(considered in chapter 2.0) and supply (chapter 3.0). 

Firstly, there is evidence that consumers value the transparency regarding a separate 

advice and manufacturer charge. Consumers appear to find the concept straightforward 

to understand and it would remove the confusion regarding advice being free. They also 

highlight the removal of provider involvement as a benefit. This would therefore 

contribute to raising the degree of trust that consumers feel towards the industry and 

financial advisers in general. It is difficult to quantify the benefits that would result from 

this, but it could result in an increase in demand from customers being more likely to 

follow the recommendations of their advisers, with 5% of existing customers investing 

more money and 15% of existing customers seeking to see their adviser more frequently. 

However, the introduction of CAR could also reduce the potential for cross-subsidy 

between different consumers with the result that consumers with a smaller amount to 

invest find it more difficult to access advice. 

There are a number of reasons to be slightly sceptical regarding the removal of such 

cross-subsidies. Firstly, advisers could already choose not to service these consumers 

today and this would increase their profitability. Secondly, price discrimination already 

occurs through active consumers requesting rebates, although CAR will encourage a 

further move in this direction. Thirdly, advisers already differentiate between clients and 

consumers, with clients seen as a valuable long-term relationship (that may not be 

economic in the short-term but will be over the longer term). 

41


5.1.2 

From a cost benefit perspective this will result in a transfer from one group of customers 

to another group of customers with no net effect. However, CAR is unlikely to reverse the 

trend for IFAs to serve lower value clients continuing the trend to serve fewer of these 

clients over time. This may be partly offset by clients being more confident in the industry 

and less resistant to following their adviser’s recommendation. 

Quality 

There are two main ways in which the quality of services offered by advisers is likely to be 

impacted. First, and the most significant change in consumer behaviour resulting from 

CAR, customers stated that they would ask intermediaries to explain the services they 

offer. Figure 16 below, shows that 84% of customers “would ask what I am getting for 

this amount”. This is an action of relatively low cost for customers since it arises when 

they are seeing their existing adviser. This might be expected to lead to greater 

competition over the price for advice although 59% of consumers agree that negotiation 

over price would be difficult because of not having clear expectations about the amount to 

pay. 

Figure 16 Changes in customer behaviour due to CAR 

I am more likely to shop around for an adviser 

It would be difficult to negotiate the price for advice as I 

have no idea what amount to expect to pay 

I would ask what I am getting for this amount 

I would ask him to provide services over time 

I would stay with my adviser but try to negotiate the 

price 

I would ask to pay a fee 

0% 20% 40% 60% 80% 100% 

Agree strongly Agree slightly Neither agree nor disagree Disagree slightly Disagree strongly 


Second, we would expect this to lead to greater clarity regarding the services that the 

consumer should expect, with the result that advisers are much more likely to provide 

such services. This may be particularly useful regarding ongoing advice. 

42

Figure 17 The role of ongoing payments of advice 

Yes - would like ongoing 

advice 

No - only want advice for the 

transaction 


0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 

For ongoing advice For annual reviews of the product For the initial purchase advice 


Figure 17 above shows that there is a link between the role of ongoing payments and 

whether or not customers would like ongoing services, with more customers who want an 

ongoing service stating that the ongoing payment was for this purpose compared to those 

who only want advice for the transaction. This is especially clear in respect of annual 

reviews. However, it also shows that around 25% of those wanting a transactional 

service believe that they are paying for ongoing advice, whilst 25% of those wanting 

ongoing advice believe the ongoing payments are for the initial transaction. 19 

One effect of CAR will be to clarify the payments to the advisers. In particular, this should 

help to reduce confusion as to whether trail commission relates to: 

• A deferred payment for initial advice; or 

• An ongoing payment for ongoing advice. 

Based on the interviews for this project, greater clarity in this area would be favoured by 

most intermediaries. Indeed, one of the striking features of the interviews with 

intermediaries for this project has been the consistency with which intermediaries state 

that ongoing payments should only be linked to ongoing advice. This represents a 

significant change in the opinions of intermediaries since CRA’s examination of 

intermediary remuneration in 2005. 

The vast majority of intermediaries interviewed agreed that, where appropriate, there 

could be an initial period during which the initial advice is paid for, but that this period 

19 It is possible that the services of the adviser were explained (and understood) at the point of sale, along with 

the justification for the ongoing advice charge. However, existing consumers are confused regarding the role of 

ongoing payments to the adviser and it is clear from the focus groups that there is a group of consumers who 

are concerned that they were not receiving any services in return for these ongoing payments. 

43


5.1.3 

5.1.4 

would need to represent a finite period of time. No intermediary was able to justify the 

use of continually ongoing payments for the provision of a fixed amount of initial advice. 

In addition, it is clear from discussions with both providers and intermediaries that 

although the cost of advice is currently disclosed at the point of sale, there is rarely any 

ongoing disclosure regarding any ongoing payments that are being made by the provider 

to the adviser. 

Failure to disclose the cost of ongoing payments for ongoing advice may mean that 

consumers who would like to have such advice are unable to assess whether they are 

receiving value for money from any such advice. Even among those intermediaries who 

are providing “holistic”, and ongoing, advice to customers over a long period of time it 

appears as though there is currently a lack of disclosure regarding the level of these 

payments. 

The ability for the consumer to decide to stop paying for ongoing advice would provide a 

significant incentive for advisers to provide high quality services over time. This pressure 

will be significantly stronger if consumers are informed about the ongoing costs of advice 

on an ongoing basis. However, in this project we have not been asked to test the impact 

of disclosing ongoing advice payments. 

The opportunity to stop payments for ongoing advice is more complex for tied 

intermediaries and providers. There are reputational issues for tied providers since they 

would be unwilling to turn people away if they asked for advice on existing products. 

Allowing the payment to be removed, even if the advice could never be withheld would be 

problematic. 

Variety 

As set out in Chapter 3.0, the impact of CAR could be to change intermediary business 

models such that they offer different ways for the consumer to pay for advice. It could 

also change the focus of competition onto product terms that better meet consumer 

needs. 

This could result in intermediaries choosing to structure their remuneration to attract 

particular types of consumer. For example, some consumers may want certainty over the 

amount they will pay, others will want their intermediary to link their payment to the 

returns on the product. Other advisers might offer a portfolio charge whilst others focus 

on the advice charge for particular products. 

However, given that advisers who are using Factory Gate Pricing products are tending to 

adopt structures of advice charges that are similar to traditional commission structures, 

we would only anticipate these benefits emerging over the medium-term. 

Efficiency of competition 

CAR could change the basis of competition in a number of ways including: 

• Shopping around; 

44

• Removing provider bias; or 

• Other unintended consequences. 

Shopping around 


Firstly CAR could result in greater pressure on the cost of advice arising as consumers 

negotiate over this cost or shop around. 

Evidence from both the focus groups and quantitative survey suggests consumers would 

find negotiation difficult. In particular, they are unclear how they would judge whether the 

advice charge is reasonable for the services offered. Instead, they report that they would 

shop around. As indicated in Figure 16, the quantitative survey found that 50% of 

consumers agreed that they were more likely to shop around for an adviser. 

However, it is common for consumer surveys to overstate changes in behaviour. In the 

case of financial advice, there are a number of reasons suggesting that caution should be 

applied to this result including that: 

• The current level of shopping around is very low, making big changes in shopping 

around appear implausible; 

• Consumers, who do not currently shop around, may not understand the time 

involved in going though the advice process on multiple occasions; and 

• Previous changes to disclosure have anticipated changes in shopping around that 

have not materialised. 20 

Due to these concerns we tested what consumers meant when they say they will shop 

around. As shown in Figure 18, this encompasses a wide range of different actions. 

20 In previous research, 73% stated that they would be more likely to shop around in response to the Menu. This 

was based on a “Yes / No“ question and is not directly comparable to the 50% quoted for CAR. CRA 

International (2002), Cost benefit analysis of the Defined Payment System and Price List for AIFA and IFA 

Promotion. 

45


Figure 18 Method of shopping around 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

Another adviser Another company Friends Newspapers or 

magazines 

Internet 


It is clear from Figure 18 that when consumers state that they would shop around, they 

are mainly thinking of undertaking comparisons through searching the internet or through 

asking friends or family. Currently few intermediaries set out their charges for advice such 

that consumers would be able to search for the cost of advice through the internet. It 

seems unlikely that this will alter dramatically in the short-term, although over time 

details of the cost of advice may be accessible through the internet (indeed this is likely to 

occur once intermediaries can benefit from providing such information). Hence, over the 

medium-term, if CAR is implemented successfully, additional gains may arise from 

comparisons through the internet. 

In the short-term, only 20% of those customers who agree that CAR would make them 

more likely to shop around (10% of all customers) would do so through comparisons with 

another adviser. 

Intermediaries were also asked how consumers would change their behaviour and around 

27% thought that CAR might lead to shopping around. This is substantially larger than 

the proportion of consumers who state that they will shop around by comparing between 

different advisers which suggests that using 10% of consumers as the increase in 

shopping around based on the consumer survey would be a cautious approach. 

In combination, therefore, these results support a modest increase in shopping around. 

Provider bias 

Second, in terms of bias, CAR should reduce the potential for provider bias. Assuming 

that advisers will set the price of their services so that it does not vary by provider, this 

could bring benefits of the order of £66 million a year assuming provider bias is 

46


completely removed. 21 (As noted below there are a number of ways in which provider bias 

could re-emerge would reduce these benefits.) Although few intermediaries accept there 

is a problem with provider bias, among those who believe that provider bias is a problem 

in the market today, 80% believed that CAR would increase trust and 90% believed that 

CAR would reduce the perception of bias. 22 

Removing provider bias should result in competition intensifying around the design of 

product terms that meet consumer needs, if this is the case, there will be additional 

benefits resulting from providers offering superior products. Where firms have introduced 

CAR products, a number of firms have been able to reduce the charges to consumers, due 

to the anticipation of improved persistency, making these products favourable for some 

consumers. 

Unintended consequences 

However, it is also possible that CAR changes the basis of competition in an unintended 

fashion. Even if intermediary firms are operating on a CAR basis, there are a number of 

other ways that actions by providers can affect decisions of intermediaries that have the 

same economic effect as commission levels. For example, inducements could be used in 

order to influence intermediary behaviour. The FSA already has rules on inducements 

and therefore its own supervisory work should ensure that this does not prevent this type 

of competition from emerging. 

There are two alternative ways that similar effects may arise: 23 

• Factoring rates can be used to transform the remuneration agreed with the 

customer that is paid over time into a lump sum payment for the adviser. Providers 

could therefore seek to compete over this factoring rate which would therefore 

reintroduce a difference in the value of CAR according to the different provider. 

Indeed, this is already being seen for existing products where those intermediaries 

with bargaining power are offered better factoring rates. 

• Decency limits are limits that some providers with FGP products apply which 

represent a limit on the amount of remuneration the adviser can chose. Some 

providers have put these in place in order to prevent a small number of advisers 

from choosing very high levels of remuneration that may not be appropriate. 

However, providers could seek to compete over these levels with the decency limit 

gradually being pushed up in order to attract advisers. 

In both cases, it is clear that provider bias could re-emerge. 

21 This is based on the £50 million of consumer detriment due to provider bias calculated in 2002 which has been 

increased to reflect increases in the size of the market over the intervening period to 2007. 

22 It should be noted that only 10 out of 101 intermediaries agreed with the statement that provider bias is a 

problem in the market today. 

23 Differences in factoring and decency rates occur in the market for factory gate products today, however, there 

is no evidence that these are causing problems today. 

47


5.1.5 

The concern about factoring could be solved in two possible ways: 

• Preventing factoring so that the pattern of payments to the adviser is exactly the 

same pattern of payments taken from the consumer – however this will have a 

significant impact on the adviser’s cash flow; or 

• Using a single industry discount rate. 

However, evidence from the consumer survey suggests that a small minority of 

consumers will remain suspicious if there is any change in payment. 

Compliance costs 

As well as bringing benefits, introducing CAR will also result in substantial compliance 

costs for advisers and providers. It will require more flexible systems that allow different 

charges for advice to be applied and new disclosure to inform consumers of the 

consequences of their actions. In the short-term this requires system changes by 

providers but in the longer term it will impose costs on intermediaries due to increased 

time with clients and answering additional queries. 

We investigated a number of scenarios including whether CAR applies to: 

• packaged investment products; or 

• packaged investment products and protection products. 

In each case we examined the cost of applying CAR to 50% or 100% of non-tied advisers. 

Examining the results according to whether CAR applies to (or is taken up by) half of non- 

tied advisers we find that the one-off costs from the provider perspective are very similar 

indicating that the main costs are associated to systems development irrespective of the 

number of advisers who operate on a CAR basis. 

Compliance cost information was gathered from ABI members and the results below are 

based on 9 responses (from companies with approximately 40% market share) which 

have been scaled up for the size of the market. The costs associated with applying CAR to 

all non-tied advisers is provided in Table 1 below. 

Table 1 Compliance costs for providers 

One-off costs Ongoing costs 

Packaged investment products £60 million £5 million 

Packaged investment products plus protection 

products 

Note: The results have been rounded to the nearest £5 million. 

Source: CRA International. 

£120 million £5 million 

At this stage it is only possible to give a broad estimate of these costs. We estimate that 

the one-off costs associated to applying CAR on packaged investment products would be 

in the order of £60 million. Assuming these are spread over a transition period of five 

years, this means a cost of around £12 million a year. Ongoing costs were estimated as 

48


being around £5 million. The figures reflect the views of providers that CAR would impose 

minimal (if any) additional ongoing costs once one-off systems costs had been incurred. 

Combining the one-off costs with the ongoing costs would bring a cost of around £17 

million per year for the first five years. 

If CAR is applied to protection products as well as packaged investment products, the 

one-off costs would double. It is likely that this increase reflects a number of factors: 

• Some one-off costs are product specific and so applying CAR to protection applies it 

to more products than when it is only applied to packaged investment products; 

• Most of the progress towards FGP products has been made in packaged investment 

products, reducing the incremental cost of increased use of CAR. While some of the 

costs of making products compatible with CAR have therefore already been incurred 

for packaged investment products, this is not the case for protection products; 

• Providers have more certainty regarding the cost of investment products because 

many of them have already made investments which may mean that the cost of 

changing protection products include some additional contingency costs or costs to 

reflect the uncertainty of change; and 

• Some providers have suggested that altering protection products incurs additional 

costs because of some of the underlying characteristics of the products and the 

systems on which they are run. For example, different distribution channels may 

have individuals with different risk characteristics that will need to be taken into 

account in the product charge. 

Based on questions in the intermediary survey, data was also gathered on the compliance 

costs for IFAs. Calculations from this suggest that the costs for intermediaries would be 

of a similar order of magnitude at around £10 million per annum in either scenario. 

It should be noted that we have not collected compliance cost information from 

investment fund managers and it is possible that there would be a difference in the costs 

of applying CAR in the fund management sector compared to the life insurance sector. 

On the basis of applying CAR to packaged investment products, combining the costs for 

providers and intermediaries finds that ongoing costs would be around £27 million per 

year. Potential benefits include an annual benefit of £66 million resulting from the 

elimination of provider bias. An alternative way to look at the potential benefits of CAR is 

to estimate the Net Present Value (NPV). We estimate that over the first five years the 

NPV of CAR is over £150 million and that the NPV becomes positive (CAR delivers net 

benefits) in the second year following implementation. 24 

Other short-term benefits have not been quantified such as increased trust and demand 

for advice, increased competition and lower charges to consumers. In the medium-term 

further benefits would be expected including shopping around, increased demand from 

non-purchasers, reductions in product bias and improvements in the quality of ongoing 

24 This calculation is based on the annual benefit of £66 million and the compliance numbers cited above as well 

as using a discount rate of 10% per annum. 

49


advice. Thus even making cautious assumptions regarding the potential benefits from 

CAR, benefits seem likely to outweigh the costs. 

Given the substantially higher compliance costs in the protection market and the concerns 

highlighted above (especially those resulting from small regular premiums), this supports 

being cautious about applying CAR to protection products. 

5.2 Summary of the CBA 

There are a number of clear benefits from the introduction of CAR including increased 

consumer confidence removing a barrier to participating in the market, removal of the 

potential for bias, and improved competition. 

The benefits from increased trust and increasing demand for advice (with 5% of existing 

customers investing more money and 15% of them visiting their adviser more often) are 

likely to be the most significant benefits of CAR but the value of benefits arising from 

these is difficult to quantify. In terms of bias, benefits of around £66 million a year would 

arise if provider bias is completely removed. This should also result in competition 

intensifying around the design of product terms that meet consumer needs and providers 

offering superior products. 

Finally, there are other potential benefits that are likely to occur over a longer period of 

time as the market develops: 

• As consumers become accustomed to CAR, it is possible that this will lead them to 

negotiate with their adviser regarding the cost of advice or to shop around to see if 

they can get better value advice. Given the lack of shopping around today it is right 

to be cautious about the magnitude of this effect in the short-term. Although large 

numbers of customers state that CAR will make them more likely to shop around, 

only 10% would do so through comparing directly between different advisers. 

• When CAR is explained to non-purchasers, they also report that this increases their 

confidence and could encourage them to see an adviser. In practice they will only 

learn of CAR when they approach an adviser (or indirectly through word of mouth), 

so this could reduce the barriers to these consumers accessing advice but is only 

likely to increase demand in the medium-term. 

• New approaches to charging for advice could result in simplified structures, such as 

using the same charge for an investment fund and an investment bond. This would 

reduce the potential for product bias, which is generally accepted to be a larger 

problem that provider bias (indeed, in 2002 it was estimated that this resulted in a 

detriment of £93 million a year), however this is only likely to occur in the medium- 

term. 

• CAR will require advisers to explain their services and the degree to which these will 

be provided over time. This will reduce confusion regarding the role of trail 

commission and increase the quality of ongoing advice. If consumers have the right 

to turn off the ongoing payments and are informed regarding its value, this will 

provide a significant incentive to advisers to provide valuable services over time. 

50

6.0 THE TIMING IMPLICATIONS 


The analysis undertaken for this project suggests that the benefits of CAR will grow as 

consumers, intermediaries and providers adjust to the new market environment. This is 

likely to take time and a realistic timescale should be set for both the introduction and 

assessment of the new regime. 

In particular, the evidence is that CAR will bring benefits in terms of perception in the 

short-term but customers are only likely to use the increased freedom of CAR, through 

negotiation and shopping around, as their confidence grows. This is because consumers 

would initially be reluctant to negotiate without a benchmark for what represents good 

value (see Section 5.1.4). Negotiation could emerge over time as consumers use their 

advisers on multiple occasions but, given the irregularity of buying products, this would 

take time. Additionally, consumers claim they will shop around, but in the short-term we 

would expect only a small group of consumers to choose to talk to multiple advisers. 

However, many more would seek advice through the internet. To the extent that this 

forms a viable way to attract customers, we would expect information on CAR to used in 

intermediary marketing. This will clearly take time to develop. 

Intermediaries will only be able to adopt CAR if providers have made the products 

available and where they do, they are likely to initially use similar advice charges to 

today’s commission structure. Only over time will innovative new structures emerge 

(since intermediaries will initially use traditional commission structures as seen in section 

3.2) and this is likely to correspond to a changing role of nationals, networks and service 

providers who will increasingly focus on negotiating better product terms, for example by 

using their bargaining power to get a lower manufacturer product charge. During the 

interviews undertaken for this project, it was clear that nationals are currently thinking 

about whether they should take responsibility for determining company wide advice 

charges, so CAR may encourage a trend that is already taking place. During interviews, 

on average, intermediaries stated that a transition period of around 5 years would be 

sufficient for them to be able to move their business onto a CAR basis. 

Providers will need to change their systems - as noted in section 4.1 although some 

providers have been using FGP products for many years, others have only been actively 

developing these in the last two years and typically they only have FGP for a subset of 

products. On average, providers reported that a transition period of 3 years was 

necessary for these changes to be made in an orderly fashion although some providers 

suggested this needed to be as long as 8 years. How providers compete in the market will 

also change and this will take time to evolve. If the regulator provides clear principles and 

guidance regarding how CAR should be implemented, the obligations resulting from TCF 

should encourage providers to compete for intermediaries through offering better 

products for consumers. Alternatively there is a danger that too much flexibility around 

CAR allows competition for intermediaries to focus on characteristics that are not 

necessarily to the benefit of consumers. 

51


Therefore we conclude that an indicative CBA finds evidence in support of applying CAR to 

the non-tied market, with a phased introduction of CAR starting with packaged 

investment products. Based on the development of products to date and the gradual 

take-up by intermediaries, a 3-5 year time period would be appropriate but will only be 

achievable with regulatory support of CAR style models otherwise it will remain only in 

market niches. Some benefits from CAR will arise in the short-term after implementation 

but changes in consumer behaviour are likely to take longer to emerge indicating that a 

longer period of time would be required to assess whether CAR brings about behavioural 

change. 

52

REFERENCES 


CRA International (January 2002), ‘Polarisation: research into the effect of commission 

based remuneration on advice: A report for the FSA’. CRA International was previously 

known as Charles River Associates. 

CRA International (June 2002), ‘Cost benefit analysis of the Defined Payment System and 

Price List for AIFA and IFA Promotion’. CRA International was previously known as 

Charles River Associates. 

CRA International (February 2005), ‘Study of intermediary remuneration: A report for the 

Association of British Insurers’. CRA International was previously known as Charles River 

Associates. 

CRA International (May 2007), ‘An Empirical Investigation into the Effects of the Menu: A 

report for the FSA’. 

Financial Services Authority (2007), ‘A Review of Retail Distribution’, Discussion Paper 

07/1. As is common market practice, we refer to this as the Retail Distribution Review or 

RDR. 

Financial Services Consumer Panel Research Paper (2005), ‘Consumer confidence in the 

financial services industry’, 2/2005. 

53

For more information, contact: 

Association of British Insurers 

51 Gresham Street 

London EC2V 7HQ 

020 7600 3333 

www.abi.org.uk

CUSTOMER AGREED REMUNERATION - CRA International

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