Risk-based pricing needs better technology to ensure good Consumer Duty outcomes, warns iVendi

Dealers can only achieve good Consumer Duty outcomes with the technology tools needed to apply risk-based pricing models, according to iVendi.

The retail technology business highlights that current systems typically do not allow dealers or consumers to see the actual interest rate under risk-based pricing until an application is made.

James Tew, CEO at iVendi, said: “We’re seeing four of the largest motor finance providers adopting a risk-based model for some or all customers. This is clearly the market direction.

“There are clear benefits for both lenders and consumers. Rather than a one-size-fits-all interest rate, the rate is determined by perceived risk, which generally supports a 'good outcome' as intended by the FCA’s Consumer Duty, a concept now well-recognized in the sector after a year of regulation.”

However, Tew pointed out that there is currently no straightforward way to compare the actual rates offered by a panel of lenders for a specific consumer using risk-based models.

“If you’re a dealer with three risk-based lenders on your panel, current technology doesn’t allow you to generate accurate quotes and make direct comparisons. Quotes are often based on the best available rate without knowing if the consumer qualifies for it.

“Without making an application, you can’t see the rate each risk-based lender offers, leaving no accurate information to base decisions on. This gap hinders meeting Consumer Duty commitments.”

Tew noted that the only way to see the actual deal offered is to apply to each lender, which impacts the consumer’s credit file, or to introduce a pre-approval process.

“Submitting multiple applications negatively affects a credit file and can harm the consumer’s credit score, making it a poor solution.

“There’s potential for a pre-approval process, where consumers provide enough information for lenders to determine the applicable rate. However, this is not widely supported in the industry and requires substantial groundwork, though we are exploring it.”

Tew also warned that in situations where the best choice for the consumer is unclear, some dealers might be tempted to choose the lender offering the highest commission.

“Given the ongoing FCA inquiry into Discretionary Commission Arrangements, this approach is even less advisable now. Dealers should strive for greater transparency, and the industry must find ways to achieve this under risk-based pricing.”