CUSTOMER AGREED REMUNERATION - CRA International

REPORT BY CRA INTERNATIONAL
4.2.2
Even if CAR would not be valuable in its own right in the tied channel, theoretically it is
possible that some form of disclosure may be necessary to prevent a regulatory failure
i.e. the application of CAR in the IFA channel might encourage consumers to use other
channels where advice is perceived to be free. However, such a regulatory failure is
unlikely because:
• It is relatively uncommon for consumers to shop around by comparing different
advisers (around 10% of consumers); and
• The group that considers both tied and independent advisers is a small minority of
this group (less than 20% of those shopping around).
One of the advantages of CAR is that consumers will be made aware that the cost of
advice has implications for the price of the overall product i.e. that advice is not free.
Despite negotiation over the cost of advice being unlikely in the short run in any channel,
it seems unlikely that such a negotiation could arise in most tied intermediaries.
Furthermore, the incentives faced by advisers in the tied channel are not directly related
to the cost of advice that is, or would be, disclosed. Hence CAR would not, in itself,
remove the potential for bias. Where advisers operate as a separate business with a
single tie, advisers may face remuneration structures similar to those of IFAs and hence
the disclosure of this remuneration would be related to the incentives faced by advisers.
However, since these advisers only offer a single tie, there is limited ability for disclosure
to reduce provider bias.
Finally, in the interviews tied providers reported that it was difficult to differentiate
between consumers on the basis of whether they wanted ongoing advice. This is because
the reputation of the company as a provider is inherently linked to its behaviour as an
adviser. In particular, tied providers indicated that reputational concerns would prevent
them from refusing ongoing advice to a customer and therefore such ongoing advice
needed to be included in the overall cost of the product and advice package. Thus there
is reason to be sceptical that CAR can bring clarity to ongoing advice in the tied channel.
We therefore do not recommend making it compulsory to use CAR in the tied channel.
Instead, providers could be encouraged to ensure the incentives faced by tied advisers
remove any potential for bias.
Application to different types of product
Again there is considerable agreement between intermediaries and consumers regarding
the ordering of the types of products that CAR should be applied to, with investments and
pensions widely supported and CAR considered less relevant for protection products
(especially by intermediaries).
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