CUSTOMER AGREED REMUNERATION - CRA International

CUSTOMER AGREED REMUNERATION
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.
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