CUSTOMER AGREED REMUNERATION - CRA International

CUSTOMER AGREED REMUNERATION
completely removed. 21 (As noted below there are a number of ways in which provider bias
could re-emerge would reduce these benefits.) Although few intermediaries accept there
is a problem with provider bias, among those who believe that provider bias is a problem
in the market today, 80% believed that CAR would increase trust and 90% believed that
CAR would reduce the perception of bias. 22
Removing provider bias should result in competition intensifying around the design of
product terms that meet consumer needs, if this is the case, there will be additional
benefits resulting from providers offering superior products. Where firms have introduced
CAR products, a number of firms have been able to reduce the charges to consumers, due
to the anticipation of improved persistency, making these products favourable for some
consumers.
Unintended consequences
However, it is also possible that CAR changes the basis of competition in an unintended
fashion. Even if intermediary firms are operating on a CAR basis, there are a number of
other ways that actions by providers can affect decisions of intermediaries that have the
same economic effect as commission levels. For example, inducements could be used in
order to influence intermediary behaviour. The FSA already has rules on inducements
and therefore its own supervisory work should ensure that this does not prevent this type
of competition from emerging.
There are two alternative ways that similar effects may arise: 23
• Factoring rates can be used to transform the remuneration agreed with the
customer that is paid over time into a lump sum payment for the adviser. Providers
could therefore seek to compete over this factoring rate which would therefore
reintroduce a difference in the value of CAR according to the different provider.
Indeed, this is already being seen for existing products where those intermediaries
with bargaining power are offered better factoring rates.
• Decency limits are limits that some providers with FGP products apply which
represent a limit on the amount of remuneration the adviser can chose. Some
providers have put these in place in order to prevent a small number of advisers
from choosing very high levels of remuneration that may not be appropriate.
However, providers could seek to compete over these levels with the decency limit
gradually being pushed up in order to attract advisers.
In both cases, it is clear that provider bias could re-emerge.
21 This is based on the £50 million of consumer detriment due to provider bias calculated in 2002 which has been
increased to reflect increases in the size of the market over the intervening period to 2007.
22 It should be noted that only 10 out of 101 intermediaries agreed with the statement that provider bias is a
problem in the market today.
23 Differences in factoring and decency rates occur in the market for factory gate products today, however, there
is no evidence that these are causing problems today.
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