CUSTOMER AGREED REMUNERATION - CRA International

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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). 38
Figure 15 Application of CAR to different products 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% CUSTOMER AGREED REMUNERATION Investments Pensions Protection Intermediaries Consumers Note: Note that the consumer results include in each product category 33% of consumers who think that CAR should apply on all types of products. Source: CRA International based on surveys of 209 consumer purchasers and 101 intermediaries conducted by ORC International. There is an argument that the application of CAR in the investment fund sector would be difficult. Based on preliminary investigations, we understand that while negotiation and differential charges would frequently arise for the initial charge (linked to the payment for initial advice), there is a standard level of trail commission that is commonly paid which is taken out of the annual management charge. All units within a particular share class charge the same annual management charge. It would be possible to apply CAR to investment funds by creating separate share classes (we understand that most fund mangers operating in the UK already set up a separate UK share class in order to gain distributor status for tax purposes). Alternatively, it may be necessary for advisers to be given permission to cancel the units of their clients which we understand would involve changes compared to the current position. Although the costs would need to be estimated, this problem does not appear insurmountable. More generally, there are, however, some strong arguments indicating that CAR is more appropriate in some parts of the market than in others. The mechanics of applying CAR The application of the CAR model for large single premium products is simpler than regular premium products. Given that there are fixed costs in providing advice, the advice cost will be proportionally larger for smaller contributions. Deducting these charges from initial contributions may make these products appear very unattractive to the consumer (or seen as inappropriate from a TCF perspective) in the short-term. While this applies mainly to regular premium products it also indicates that there may be a minimum value of investment for single 39
Page 1 and 2: ABI RESEARCH PAPER 6 CUSTOMER AGREE
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