Beyond the FCA report: rules of engagement

watkiss neil

There is no denying it is a very interesting time to be involved in the automotive F&I marketplace.

Through regular contact with UK lenders, dealers and brokers to discuss the impact of the Financial Conduct Authority’s review into the motor finance sector, it is clear there is a great deal of internal discussion as how best to respond to the FCA’s report findings. Change is coming. However, a consensus on exactly what the revolution will look like, is yet to emerge.

Clearly, those lenders currently operating with conventional DiC and Reducing DiC commission models will need to adopt a new approach. They must also work with dealers and brokers to ensure that customers are provided with adequate and timely explanations.

There will be process changes introduced by lenders to the assessment of creditworthiness, including affordability. These, after all, were the three main areas of widespread non-compliance identified by the FCA.

You might not need a crystal ball to predict these initial responses to the report, but it is interesting to look beyond these immediate changes, and focus on the possible implications of any such developments.

While the FCA’s involvement is – quite correctly – intended to protect the interests of the consumer, there’s always a danger that well-intentioned intervention has unforeseen consequences.

Research has shown that many customers are already frustrated by the amount of paperwork and bureaucracy they are required to wade through when purchasing a car. Although such form-filling was created primarily to protect the buyer’s interests, it is now become something of a ‘regulation paradox’, which is open to much cynicism.

Older readers might remember episodes of ‘Yes Minister’, in which civil servants buried difficult information within masses of other files, so that the troubling information was never found. Similarly, a younger audience might be familiar with a Viz magazine spoof of a reader’s letter:

“SPIES. Why not hide messages you don’t want others to read as ‘Terms and Conditions’ on the internet?”

As such, more information does not always equate to greater clarity. Quite the opposite, in fact. The challenge for the industry now is to provide the consumer with the necessary information in the most concise and least intrusive manner. As such, care must be taken to ensure any reform provides the consumer with greater clarity rather than less.

The implications of the anticipated changes to commission models have the potential to alter the dynamics of the motor finance marketplace. As DiC commissions are phased out, lenders might be expected to gravitate to flat fee models.

Dealers and brokers might quite reasonably conclude that the most compliant commission arrangement is for all prime lenders, for example, to operate from identical commission packages. After all, they might not wish to be accused of directing customers to one lender over another purely for profit.

Consequently, the scope for lenders to compete against each other on commission would be restricted or removed.

The conventional wisdom holds that the removal of competition acts against customer interests, so care is required to ensure that modification delivers the intended improvement in buyer outcomes, rather than any inadvertent negative impact.

It’s highly likely that there will be significant restrictions on the ability of dealers or brokers to set the customer’s sell-out rate. This will inevitably make it more difficult for lenders to compete against each other primarily on commissions.

In turn, this should result in an increase in inter-lender competition in other areas. Clearly, lenders will compete by increasing the speed and efficiencies of their own processes, in order to improve the customer experience.

As a result, we’ll see more lenders, in conjunction with dealers and brokers, adopting soft-search underwriting, e-signature technology, self-billing invoicing, paperless pay-outs and the application of AI technologies.

It is important to remember that the FCA report does not state it is wrong for dealers, brokers and lenders to make a profit from motor finance. The regulator has no issue with ‘rate-for-risk’ pricing, and accepts the principle that a dealer or broker can earn more commission when they undertake more work on the lender’s behalf.

Any profit generated, by implication, must be achieved fairly, consistently and transparently. And, no, that does not mean commission disclosure (at least not yet). Moving forwards, justification for dealer and broker profit will be based upon the speed and convenience of service offered to the customer.

Don’t underestimate the emphasis customers place on efficient service either. Car purchasing website plays on the fact that the customer might get a better price by selling privately, but asks the question: “do you really need all that extra hassle?” The customer is effectively happy to pay a premium for speed and convenience.

Continued finance profitability and improved customer outcomes don’t have to be incompatible. As an industry, our challenge is to navigate our way beyond the FCA report into a fair, consistent, transparent and profitable future.

* Neil Watkiss (pictured) is head of consumer credit at fintech company DealTrak. DealTrak is a platform that connects the automotive F&I world, covering dealers, lenders, brokers and insurers.