CUSTOMER AGREED REMUNERATION - CRA International

REPORT BY CRA INTERNATIONAL
advice. Thus even making cautious assumptions regarding the potential benefits from
CAR, benefits seem likely to outweigh the costs.
Given the substantially higher compliance costs in the protection market and the concerns
highlighted above (especially those resulting from small regular premiums), this supports
being cautious about applying CAR to protection products.
5.2 Summary of the CBA
There are a number of clear benefits from the introduction of CAR including increased
consumer confidence removing a barrier to participating in the market, removal of the
potential for bias, and improved competition.
The benefits from increased trust and increasing demand for advice (with 5% of existing
customers investing more money and 15% of them visiting their adviser more often) are
likely to be the most significant benefits of CAR but the value of benefits arising from
these is difficult to quantify. In terms of bias, benefits of around £66 million a year would
arise if provider bias is completely removed. This should also result in competition
intensifying around the design of product terms that meet consumer needs and providers
offering superior products.
Finally, there are other potential benefits that are likely to occur over a longer period of
time as the market develops:
• As consumers become accustomed to CAR, it is possible that this will lead them to
negotiate with their adviser regarding the cost of advice or to shop around to see if
they can get better value advice. Given the lack of shopping around today it is right
to be cautious about the magnitude of this effect in the short-term. Although large
numbers of customers state that CAR will make them more likely to shop around,
only 10% would do so through comparing directly between different advisers.
• When CAR is explained to non-purchasers, they also report that this increases their
confidence and could encourage them to see an adviser. In practice they will only
learn of CAR when they approach an adviser (or indirectly through word of mouth),
so this could reduce the barriers to these consumers accessing advice but is only
likely to increase demand in the medium-term.
• New approaches to charging for advice could result in simplified structures, such as
using the same charge for an investment fund and an investment bond. This would
reduce the potential for product bias, which is generally accepted to be a larger
problem that provider bias (indeed, in 2002 it was estimated that this resulted in a
detriment of £93 million a year), however this is only likely to occur in the medium-
term.
• CAR will require advisers to explain their services and the degree to which these will
be provided over time. This will reduce confusion regarding the role of trail
commission and increase the quality of ongoing advice. If consumers have the right
to turn off the ongoing payments and are informed regarding its value, this will
provide a significant incentive to advisers to provide valuable services over time.
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