Cost Benefit Analysis of the Defined Payment System and Price List

The Association of Independent Financial Advisers and IFA Promotion commissioned Charles River Associates to undertake a preliminary cost-benefit analysis of the changes that the FSA is proposing to make to the regulation of the independent advice sector. The analysis is preliminary in the sense that it has been carried out at a time when the policy proposals in CP121 have not been developed into a full set of proposed rules. It has also inevitably been undertaken with limited time and resources for primary research, and as with all ex ante analysis depends on projections and extrapolations based on current experience.
This cost-benefit analysis (CBA) does not cover all of the CP121 proposals – in particular, it does not consider the potential benefits of the measures the FSA has proposed to liberalise the tied sector. Instead, it focuses on the likely effects of the proposed Defined Payment System (DPS) of remuneration for independent advisers. This is an appropriate topic to analyse, because the DPS can be separated from the rest of the FSA’s proposals.
Our work suggests that, taken by itself, the DPS will not be beneficial and could, in fact, be worse in cost-benefit terms than the status quo. But the FSA has identified genuine problems in the current independent sector, and they ought, if possible, to be remedied through regulatory change. To that end, this report sets out – as one of several possible approaches – a concept in which IFAs could continue to be remunerated through commission, but would be obliged by regulation to reveal the cost of advice to customers before the start of the advice process. We refer to this alternative as the Price List.
This report includes a CBA of the Price List, which shows that it would have some significant advantages compared with the status quo, and that its benefits are likely to exceed its costs. The Price List is thus better than the DPS proposal, and under some circumstances could be very much better.