FCA consultation set to have ‘significant impact’ on car sales and finance

Executives in car sales and finance should expect any formal guidance that follows a Financial Conduct Authority consultation on staff incentives and performance management to have a significant impact, experts have warned.

In July, the UK’s FCA issued a consultation document called ‘Staff Incentives, Remuneration and Performance Management in Consumer Credit’.

It is seeking feedback from the market by October and says: “We are proposing a new rule and guidance on staff incentives, remuneration and performance management to address concerns about how consumer credit firms pay and incentivise their staff and manage the risks arising from these arrangements.”

The high-level rule would require firms to put in place “adequate arrangements” to detect and manage any risk of non-compliance with their regulatory obligations arising from their remuneration or performance management practices.

The FCA’s research found that many firms had taken positive steps in the way they reward and incentivise staff, including some firms that had taken on board previous guidance on the risks from financial incentives.

It added that it has identified examples of good practice where firms have incentivised staff to act in the interests of their customers, or have put in place effective controls to manage the risks from their incentive schemes and performance management.

However, it warned: “Too many of the firms in our sample had high-risk elements in their incentive schemes and had either not recognised the risks these posed to customers, or had not taken sufficient steps to manage those risks.

“Additionally, we found that many firms, where consumer credit activities were ancillary to their main business (such as selling retail goods), as well as a number of lenders, had not properly assessed the risks associated with their consumer credit activities, or the impact that staff incentives could have on those risks.”

Among firms whose primary business was not financial services, FCA research found 64% of its research sample “posed a high, or very high, risk of customer detriment”.

Risks arising from incentive schemes arose primarily where staff earned bonus or commission payments based on the volume or value of sales or collections.

Areas of particularly high risk included schemes where commission accounted for the majority (or all) of customer-facing staff’s pay, areas where different rates of commission were earned for different products (particularly substitutable ones) or where the rate of commission varied depending on reaching certain targets.

Responding to the consultation, Karl Werner, MotoNovo Finance motor division CEO, said: “The FCA’s announcement, which is set to affect customer facing staff and their managers across all areas of lending and collection activity, is likely to have a significant impact on both car sales and car financing.

“Overall, we believe that the changes that are likely to be required will help to enhance consumer perceptions of dealer finance by ensuring their needs are at the forefront of the credit process.”

Werner said MotoNovo would work with the FCA and dealers to achieve positive change and said dealer finance will remain a key aspect of car sales, with the dealer an important part of the process.

He also welcomed the more prescriptive approach from the FCA in how it expects the market to operate.

These include areas such as assessing the risks associated with consumer credit activities and insight on staff incentives that they see as having both a positive and negative impact upon the consumer.

Werner said that even in the case of 0% finance, where no dealer or salesperson income may accrue, the risks to the consumer and due processes will need to be addressed in the way the finance is promoted.

He added: “Given the prominent role of finance as a marketing tool in car sales, we foresee an even more important focus for dealers on creating a positive customer experience; one that can further enhance the reputation of dealer finance.

“Within this, the importance of measurable procedures and controls in the financing approach will increase.

“It seems probable that we will see a wider role for technology with the customer taking greater control of their own finance journey.”
This would include self-service finance elements built into dealer platforms.

“[The FCA] are at pains to point out that there is no ‘one size fits all’ approach, but we can see a path emerging to help guide dealers on the likely changes ahead,” Werner said.

Comments are required for the consultation paper by October 4, 2017