What does the FCA’s latest review mean for the UK automotive finance industry?

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The latest FCA consultation paper announcement marks the move from traditional motor finance commission models – which incentivise the dealer or broker to raise customer interest rates in order to get higher commissions – to an approach that provides more positive outcomes to car buyers. As seen earlier this year, the FCA wants to make wholesale changes to the way in which the motor finance commission model operates. The way in which commission has previously been calculated will undergo a significant change. Martin Hill, managing director of automotive fintech company DealTrak, looks at the longer-term implications for the automotive sector, and why those operating within the F&I space should buck the trend.

The FCA’s motor finance regulations

Although the industry has been regulated since 2014, it is only over the last couple of years that the FCA has taken a very specific look at motor finance commissions within the automotive finance sector. It’s clear that the regulator’s investigations have been very considered and reflective – and it will mean a shake-up of what has been considered the norm for so long.

As the consultation period begins, rather than waiting to hear what’s next from the FCA, dealers need to adapt to the shifting landscape in order to steal a march on the competition.

It’s looking increasingly likely that the FCA is leaning towards a move to approaches such as a flat fee structure, similar to the mortgage and pensions industry.

The Motor Finance report earlier in the year suggested that car dealers and brokers should be looking to justify their commissions in this area. For instance, how much work is the dealer or broker really doing on behalf of the customer, or is a large finance commission simply for submitting a finance proposal seen as being acceptable in the FCA’s eyes?

By using functionality such as credit screening tools to connect the car buyer with the right lender partner, instead of simply inputting the customer details and proposing across a range of lenders (sometimes at the same time), the motor dealer can potentially begin to build value in their commission fee by taking the time to connect the buyer with the right product.

Commission and mandatory disclosure

It looks likely that mandatory commission disclosure is coming, but buyers are entitled to ask a dealer to share how much commission they will make on any finance agreement already. At present, it’s not happening with any regularity, partly because consumers are not used to asking for this sort of information from a motor dealer, and partly because the customer doesn’t really know how to evaluate that information when they have it.

To draw a comparative example from the mortgage industry, how many people, when presented with the amount of commission that the mortgage advisor is receiving for brokering the deal, then go and do something with that information? Most do not.

The FCA wants to make sure that all customers have complete understanding of what a dealer will gain in commission from their deal, and allow them to make an informed choice as to whether they think enough work has been done to match them with the finance package which suits their personal situation and lifestyle. 

How must the industry adapt?

As an organisation, DealTrak intends to respond to the consultation paper. We see several million finance proposals being processed through the platform annually, and by playing a positive role in this part of the consultation journey, we believe that we have powerful data insights that can begin to positively shape outcomes.

There are still many dealers that are using disjointed systems or multiple interfaces to deliver on their F&I objectives. However, this old-fashioned approach is no longer in line with the regulations; the FCA still expects a dealer to have suitable systems and controls to run their business, and this is made very difficult with multiple systems in a showroom.

Motor dealers can find it difficult to juggle the requirements of a successful sales process with the requirements to be compliant and treat customers fairly and consistently. In an ideal world, a dealer would be able to bring compliance obligations seamlessly into their existing sales process; it shouldn’t have to be a case of ‘either or’.

DealTrak can help by providing a fully-integrated compliance solution that gives comfort to the dealer staff that they are doing a good job and allows the lender panel of the dealer to have meaningful compliance oversight over their agents.

* Martin Hill is managing director of DealTrak, a platform developed to assist in managing regulated activity for the sale of automotive finance and insurance products. The platform is used by 1,100 dealerships across the UK, and processed more than 3.6 million proposals last year.