CUSTOMER AGREED REMUNERATION - CRA International

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REPORT BY CRA INTERNATIONAL 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 CUSTOMER AGREED REMUNERATION 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
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