Why The FCA's Motor Finance Report Is Positive Catalyst For Change
Last week, the Financial Conduct Authority (FCA) published its long-awaited Motor Finance Report. While the headline-grabbing findings likely made for uncomfortable reading for many within the automotive industry. Neil Watkiss, head of consumer credit at DealTrak, believes the research will mark a real positive catalyst for change for consumers.
The report – which follows on from the FCA’s interim findings published 12 months ago – focused heavily on commission figures, relating to sales of motor finance. It also hinted towards a consideration of banning unfair commission models and limiting car dealers and finance brokers’ ability to set car finance rates.
The watchdog homed in on commission arrangements, and said it was worried these practices “may be leading to consumer harm on a potentially significant scale”. The report also found that car dealers and finance brokers’ often fail to explain finance agreements or interest rates properly, leading to customers making decisions based on poor information.
What does that mean for buyers?
The FCA regulations are built around the principle of putting the customer at the heart of everything the industry does.
The report recognises that customers in different circumstances have different needs. The watchdog accepts the principle of “rate for risk”, where finance companies can charge a higher rate for customers with a poor credit profile.
It also recognises that a dealer or broker might justify charging a higher rate to a customer to reflect the amount of work that they have done in processing the proposal on the customer’s behalf. However, it completely rejects the idea that a dealer should be able to charge the customer a higher interest rate simply to earn more commission!
As a result, lenders are expected to review their systems and controls in light of the report's findings. It is extremely likely this will lead to changes in the calculation of finance commission as well as the amount received.
How did they find out?
In order to understand the industry in action, the FCA conducted several mystery shopping exercises. And – sadly – the report asserts that customers were not provided with enough information to make informed decisions around what they were buying.
In addition, the FCA “found evidence that disclosures or explanations given during the initial visit were often incomplete, and sometimes potentially misleading”.
However, there was an important proviso. By not following the customer journey all the way through to the final sale, the FCA was “unable to fully test all elements of pre-contract disclosure and explanations”.
As a result, lenders are criticised for appearing to be over-reliant upon standard documentation and contractual terms, in addition to not providing enough oversight of their intermediaries. The FCA also implies that lenders are more invested in their own credit risk, than assessing the affordability of the loan for the customer, when of course dealers and brokers have a significant role to play when it comes to establishing affordability.
What does this all mean for customers?
If you’re looking to purchase a car on finance, then the best thing you do before you head to a dealership is to do your research. Many dealerships can conduct a soft search on your behalf – without having a detrimental impact on your credit score - to help you identify the most suitable lender for your needs – without having a detrimental impact on your credit score.
Do not be afraid to shop around. If you don’t believe that a dealer or broker is being open and transparent with you, then walk away. There are some excellent dealers and brokers out there who work hard to operate fully in accordance with the regulations. After the publication of this report, hopefully all will be working to the same high standards.
We know this report will stimulate further evolutionary – possibly revolutionary – change to the industry, and as a technology provider working with both dealers and lenders, we will do our bit to ensure a fairer, compliant and buoyant car buying landscape for all concerned.
Why The FCA's Motor Finance Report Is Positive Catalyst For Change, 17th March 2019, 16:52 PM