The FCA today published its long-awaited Motor Finance Report, and there’s no escaping that it will make for uncomfortable reading for many within the automotive industry. However, Neil Watkiss, head of consumer credit at DealTrak, believes the research will inevitably mark a real positive catalyst for change.
Today’s report – which follows on from the FCA’s interim findings published 12 months ago and has been circulated to motor finance firms – hints towards a consideration of banning unfair commission models and limiting car dealers and finance brokers’ ability to set car finance rates.
The watchdog homed in on commission arrangements, and said it was worried these practices “may be leading to consumer harm on a potentially significant scale”. The report also found that car dealers and finance brokers’ often fail to explain finance agreements or interest rates properly, leading to customers making decisions based on poor information.
A closer look at commission
Taking a detailed look at commission arrangements, pre-contract disclosures and affordability, there will undoubtedly be impassioned discussion taking place between lenders, dealers and brokers around the UK today.
The FCA make it clear that lenders are expected to review their systems and controls in light of the report's findings. It is extremely likely this will lead to changes in the calculation of finance commission as well as the amount received.
While many lenders have long-since dispensed with the conventional ‘Difference in Charges’ (DiC) commission model – through which dealers and brokers can sell up from a base rate to earn increasing levels of commission – they have instead adopted the ‘Reducing DiC’ model, whereby dealers and brokers can sell down from a standard rate, for reducing levels of commission. Significantly though, the FCA believes the ‘Reducing DiC’ model is just as detrimental to customer outcomes as the conventional model.
Mystery shopping findings
In order to understand the industry in action, the FCA conducted several mystery shopping exercises. And – sadly – the report asserts that customers were not provided with enough information to make informed decisions.
In addition, the FCA “found evidence that disclosures or explanations given during the initial visit were often incomplete, and sometimes potentially misleading”.
However, there was an important proviso. By not following the customer journey all the way through to the final sale, the FCA was “unable to fully test all elements of pre-contract disclosure and explanations”.
As a result, lenders are criticised for appearing to be over-reliant upon standard documentation and contractual terms, in addition to not providing enough oversight of their intermediaries. The FCA also implies that lenders are more invested in their own credit risk, than assessing the affordability of the loan for the customer, when of course dealers and brokers have a significant role to play when it comes to establishing affordability.
How can DealTrak help?
In the words of the report itself: “The increase in showroom point-of-sale/finance quotation systems and their use in the sales process was seen by lenders to drive better disclosure”. However, here at DealTrak, we have always believed that excellent technology would drive the better treatment of customers.
As the industry-leading F&I platform, DealTrak is committed to working with lender partners, as well as dealer and broker clients to address the issues highlighted in the report. We believe that we can contribute to delivering process and regulatory improvements that will drive positive outcomes for each party.
Most importantly we can facilitate the delivery of positive consumer outcomes, which, after all, is the object of the exercise. Our compliance module can ensure that dealers and brokers offer a thorough, transparent and auditable sales process. It can also provide lenders with comfort that their introducers are operating in a fully compliant manner.
And finally…
We know today’s report will stimulate further evolutionary – possibly revolutionary – change to the DealTrak platform, and by extension to our industry. As a result, we welcome discussions with lenders, dealers and brokers to help them to shape that future.
To speak to a member of the DealTrak team, contact us here.