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Our retail distribution review (RDR) discussion paper DP07/1 in June 2007 introduced customer-agreed remuneration as a means of reducing the distorting influence of providers on the advice process.

Because different people drew different conclusions from the name, we did not use it again when we published the RDR interim in April 2008. But the concept remains and we explain this further on this page.

We need to go back to basics to properly understand what we mean by remuneration determined without input from product providers, and to demonstrate how this could reduce conflicts of interest. We start by considering remuneration under two fundamentally different headings:

• how remuneration terms are set, and
• how the remuneration is paid.

Our proposals simply tackle how remuneration terms are set. Whether there is a need for consumers to haggle or only to acknowledge the remuneration terms is not the main issue. Our principal intention is that the product provider plays no role in setting the terms and therefore cannot influence the advice process.

Having agreed or acknowledged it, there are then only two ways for the customer to pay the remuneration:

• the customer pays direct (for example a fee, perhaps drawn by cancelling units in the customer's investment account); or
• a third party – nearly always the product provider whose product has been sold – pays on the customer's behalf and the customer then reimburses that party. In this case the transactions can look like "commission" – for instance, an upfront payment to the adviser with the customer paying an additional charge over the full term of the product to reimburse the provider. But the important difference is that, unlike with traditional commission approaches, the product provider has not determined how much the adviser receives.

It follows that there might be no constraints on how the remuneration is paid (or the payment pattern) under this approach, so long as product providers cannot influence the amount or timing of the remuneration and thereby potentially bias the advice.

So the proposals are not for another method of remuneration – it is simply a different way to set remuneration terms. Factory gate pricing (FGP) is then one way that product poviders can structure their products to accommodate this approach.

Under FGP, a product provider (playing no part in setting how much is paid and when) can arrange payments to the adviser, and then add explicit charges to the product for the customer to reimburse the product provider for the remuneration payments.

But FGP is not the only way that product providers might accommodate remuneration determined without provider input – commission rebating may be another possibility.