FCA's new Consumer Duty makes transparency and consistency vital in car finance

With December’s publication of the Financial Conduct Authority’s (FCA) second consultation on its new all-encompassing Consumer Duty protocols and the automotive retail sector now subject to commission disclosure regulations, motor finance has once again been reassessing how it operates.

Here, three finance providers and the National Franchised Dealers Association (NFDA) give their insights.

AM spoke with Alphera director Preston Rogers (PR); managing director of Close Brothers Motor Finance Seán Kemple (SK); Oodle managing director Philip Williams (PW); and NFDA chief executive Sue Robinson (SR). A finance analyst, who asked to remain anonymous, also contributed.

1. How have the FCA’s rules updated the way retailers do business over the past 18 months?

PR: There’s more simplicity for customers and more transparency which is taking a lot of the haggling away and that’s a positive. It has not taken away the negotiation, people still negotiate on price and the part-exchange. Online, the ability to transact has become quicker because what is seen is far more representative of what will be paid in the showroom.

SR: Franchised dealers have responded positively to the new rules and have been taking all necessary measures to ensure full compliance. Many dealers were moving towards the new rules before these came into effect.

PW: Many of the dealers and brokers we work with had already adopted best practice before the regulations came into force. However, there is more finance partners can do to help dealers create the right customer outcomes and the best buying experiences. These changes are going to force the motor finance industry to innovate and provide value to dealers in other ways, for example service levels, digital capability and customer experience.

SK: The FCA’s rules have been received positively by the industry and retailers. Far from impacting profitability, retailers have adapted to the regulatory changes, resulting in enhanced opportunities to sell vehicles and POS finance for many retailers. While dealers haven’t had to make fundamental changes to the way they do business, they have needed to adapt their processes to ensure adoption of the FCA’s rules and of new lender financial models. Ultimately, the regulation facilitates greater adherence to the rules and principles of treating customers fairly (TCF).

2. Is there a growing interest or was there a spike in interest from customers in commission earned as part of a sale when the changes were introduced?

PR: We have not seen a change. We have not noticed a difference in the number of customers asking for the commission amount to be disclosed. What we are seeing is when a customer needs to speak to a dealer because there is only one APR (annual percentage rate) available, it ends up being a discussion at that point. I think that conversation is taking place much more than it used to, but customers are focused very much on the monthly payment. They can compare nationally, by brand, and see if the deal is a good deal for them.

SR: NFDA members’ feedback suggests there has been no major increase in consumers requesting commission disclosure. So far, the proportion of consumers doing so is marginal. We are aware that few dealers have been contacted by the FCA about how they are complying with the rules for background information and have responded well.

PW: With increased online research, consumers are now more aware of rates and terms than ever before – but more can be done to promote the change among Sponsored by customers and encourage the right conversations. If you think of the mortgage industry, commission disclosure is totally normal. We need to transition to a similar model of commission disclosure in motor finance.

Industry analyst: On offering each consumer the same rate, customers with good credit ratings, who would likely have been rewarded with a lower APR, will now subsidise riskier borrowers who, with their pick of lenders, could take their businesses elsewhere. I think we should be concerned that the most prominent change has been a move to fixed rates and that the £165m of savings forecast publicly by the FCA may not be delivered.

3. How will the proposed Consumer Duty impact retailers further?

PR: TCF is already entrenched but there may be a greater emphasis on firms to document what they are doing and to evidence what they are doing. We have a very good and robust document provenance, but we may have to document more than we do today to evidence good customer outcomes. The bar is going up and we have to take a consistent approach. At the bottom of the market there may be some businesses that have to do some work and get this higher up on the agenda but, for the most part, I have seen a change in awareness on this topic over the past few months, it is starting to gather momentum. On a base level, the new Consumer Duty is not that different to TCF. If dealers are already doing that and you are well intentioned on those principles then the world will not change. We have let go around a dozen partners because we don’t think they can make the grade long term. I would rather do that than have a customer have a poor outcome.”

Industry analyst: The FCA’s Consumer Duty consultation paper, which covers all retail finance, was quite explicit in noting that, while the regulator saw many good practices, ‘too many firms that are not adequately considering the needs of their customers, or prioritising good consumer outcomes as an objective of their business activities’. I’m sure in early 2022, the sector will be working to establish what this means in practice. However, I suspect the outcome of FCA’s supervisory work to assess the January 2021 changes will be something that may well start to reflect the proposed Consumer Duty.

4. What effect will non-regulated leasing and subscription solutions have on franchised car retailers?

PR: If the FCA saw something where it thought the industry was not leading itself in that space, they would take action and then force them to do so. From a principled perspective, if you present a customer with a product, they should be told all the salient points, they should be properly compared and they should know all their rights and obligations.

PW: The important thing here is making sure we create brilliant customer outcomes and genuine finance transparency, however people choose to pay for their car.

5. How has your network adapted to provide a more transparent, customer friendly finance proposition in recent months, particularly online?

PR: Because of COVID, dealers have been wanting to close the sale far more quickly so they have removed some of the moving parts in the online proposition. The price you see is the price you pay and they have seen more sales because of that and I’m sure the FCA would like the sound of that because we have taken the haggle away, made it more transparent and simplified the process.

SK: The pandemic has led to a fundamental shift in consumer habits and behaviour, in particular, inciting rapid acceleration of digital buying. This had a knock-on effect on the typical finance journey. As a lender, Close Brothers Motor Finance has worked to support our partners capitalise on this shift, and to help make the car-buying process and access to finance meet consumer needs.

PW: We know that 54% of customers want to arrange their finance before they buy their car – and we believe that trend will only increase. Our approach is to facilitate a digital finance-first journey. We make finance an easy, transparent process, helping customers get very comfortable with their budget before they buy.