CUSTOMER AGREED REMUNERATION - CRA International

CUSTOMER AGREED REMUNERATION
• 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.
However, introducing CAR will also result in substantial compliance costs for advisers
and providers. It will require more flexible systems that allow different charges for
advice to be applied and new disclosure to inform consumers of the consequences of
their actions. In the short-term this requires system changes by providers but in the
longer term it will impose costs on intermediaries due to increased time with clients
and answering additional queries. At this stage it is only possible to give a broad
estimate of these costs if CAR is applied to packaged investment products:
• Providers: We estimate that the one-off costs for providers would be of the order
of £60 million, assuming these are spread over five years this means a cost of
£12 million a year. There would be additional ongoing costs for providers of
around £5 million a year. The figures reflect the views of providers that CAR
would impose minimal (if any) additional ongoing costs once one-off systems
costs had been incurred. 2
• Intermediaries: Assuming all of today’s IFAs adopt the CAR model, compliance
costs would be of the order of magnitude of £10 million per annum.
Overall the costs are estimated as £27 million per year. Potential benefits include £66
million if all provider bias is removed as well as benefits that have not been quantified
such as increased trust and demand for advice, increased competition and lower
charges to consumers. On a Net Present Value basis, we estimate that CAR could
deliver net benefits in excess of £150 million over the first five years. Further benefits
that have not been included but that would be expected in the longer term include
shopping around, increased demand from non-purchasers, reductions in product bias
and improvements in the quality of ongoing advice. Thus even making cautious
assumptions regarding the potential benefits from CAR, the benefits seem likely to
outweigh the costs.
Over what time period should CAR be introduced?
The analysis undertaken for this project suggests that the benefits of CAR will grow as
consumers, intermediaries and providers adjust to the new market environment. This
is likely to take time and a realistic timescale should be set for both the introduction
and assessment of the new regime.
The analysis finds that CAR will bring benefits in terms of perception in the short-term
but customers are only likely to use the increased freedom of CAR, through negotiation
and shopping around, as their confidence grows. Given that these products are
purchased infrequently, this confidence will take time to grow.
2 It should be noted that we have not collected compliance cost information from investment fund managers.
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