CUSTOMER AGREED REMUNERATION - CRA International

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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. 34
Figure 12 The use of FGP products and share of revenue 70% 60% 50% 40% 30% 20% 10% 0% Independent IFA (nonnetwork) National Financial Adviser (IFA) firm Currently use FGP products % of revenue CUSTOMER AGREED REMUNERATION Network member IFA All IFAs Source: CRA International based on survey of 101 intermediaries conducted by ORC International. 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
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