CUSTOMER AGREED REMUNERATION - CRA International

REPORT BY CRA INTERNATIONAL
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.
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