CUSTOMER AGREED REMUNERATION - CRA International

5.0
5.1
5.1.1
INDICATIVE COST BENEFIT ANALYSIS
CUSTOMER AGREED REMUNERATION
To determine whether CAR would result in economic benefits that exceed the costs of
implementation, we need to compare the market outcome following the introduction of
CAR with what would happen in the absence of CAR being encouraged (the ongoing
trends in the use of CAR were examined in section 4.1). In this chapter we therefore
focus on the impact of encouraging CAR on:
• The quantity of advice and products purchased;
• Quality;
• The variety of advice propositions and products on the market;
• The efficiency of competition; and
• Compliance costs.
Impact of CAR
To determine whether encouraging CAR would yield net economic benefits, we need to
consider the impact on the market and the corresponding compliance costs.
Quantity
The impact on the size of the advice market is determined by the impact on demand
(considered in chapter 2.0) and supply (chapter 3.0).
Firstly, there is evidence that consumers value the transparency regarding a separate
advice and manufacturer charge. Consumers appear to find the concept straightforward
to understand and it would remove the confusion regarding advice being free. They also
highlight the removal of provider involvement as a benefit. This would therefore
contribute to raising the degree of trust that consumers feel towards the industry and
financial advisers in general. It is difficult to quantify the benefits that would result from
this, but it could result in an increase in demand from customers being more likely to
follow the recommendations of their advisers, with 5% of existing customers investing
more money and 15% of existing customers seeking to see their adviser more frequently.
However, the introduction of CAR could also reduce the potential for cross-subsidy
between different consumers with the result that consumers with a smaller amount to
invest find it more difficult to access advice.
There are a number of reasons to be slightly sceptical regarding the removal of such
cross-subsidies. Firstly, advisers could already choose not to service these consumers
today and this would increase their profitability. Secondly, price discrimination already
occurs through active consumers requesting rebates, although CAR will encourage a
further move in this direction. Thirdly, advisers already differentiate between clients and
consumers, with clients seen as a valuable long-term relationship (that may not be
economic in the short-term but will be over the longer term).
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