CUSTOMER AGREED REMUNERATION - CRA International

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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. ABI Contacts: Copies of ABI Research Papers are available on the ABI website at: http://www.abi.org.uk/Bookshop/default.asp Copies of ABI Research Papers may also be obtained from Research Department, Association of British Insurers, 51 Gresham Street, London, EC2V 7HQ; Tel: +44 (0)20 7216 7390; Fax: +44 (0)20 7216 7449; email: research@abi.org.uk. For Press queries, please contact the ABI’s media team on Tel: +44 (0)20 7216 7394; email: info@abi.org.uk. 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 being published in order to help inform the insurance industry and to contribute to public policy debate, and should be used only in that context. For that reason neither the author nor the ABI shall have any liability for any loss or damage arising in connection with the publication or use of this paper or the information in it. Neither the author nor the ABI are authorised for the conduct of investment business (as defined in the Financial Services and Markets Act 2000) and this paper is not intended as, and shall not constitute, investment advice. Copyright: © Association of British Insurers, 2008. The information may only be used for private or internal use (provided that fair attribution of copyright and authorship is made). This paper shall not be used for commercial purposes (except for internal use, provided that the copyright and any other proprietary notices are not removed). Reproduction in whole or in part, or use for any commercial purpose (save as provided above) requires the prior written approval of the Association of British Insurers and such consent may be withheld or made subject to conditions. ISBN 978-1-903193-35-4
EXECUTIVE SUMMARY CUSTOMER AGREED REMUNERATION 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
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