Are the new FCA automotive retail regulations having the desired effect?
Six months after the introduction of new regulations from the Financial Conduct Authority (FCA), auto retailers are expected to start seeing an impact on average commission levels as they adjust to a new way of working.
Since January 28, the FCA has banned all discretionary commission (DiC) models in auto finance, forcing the industry to introduce alternatives such as risk-based pricing or fixed commission rates.
The FCA wanted to eliminate the type of financial commission where brokers or retailers were rewarded for charging consumers higher rates.
When the rules were announced in July 2020, the FCA said it wanted to save £ 165million for customers. This figure is said to be the result of the general decline in commission rates.
However, Alphera’s national sales manager Kirk Franks says there has been no major impact.
Franks told AM: “We have had conversations with some partners who were concerned about financial penetration, but they have held up or improved. Customers understand it, dealer staff understand it, and from the anecdotal feedback I’ve had, I have had no qualms or potential issues as a result of the DiC ban. This change was small and didn’t cause any issues for the customer journey either.
The ideal outcome for FCA and customers is to see commission levels reduced, but for dealers this must coincide with an increase in total volumes to compensate for any loss in revenue.
This was the case at MotoNovo on Used Car Financing, which introduced its “MotoRate” risk-based pricing in July 2020.
Risk-based pricing is a method that lenders can use to determine auto finance interest rates based on the creditworthiness and risk of the applicant. If a customer has a good credit score, they get a better APR percentage. If poor, the APR percentage goes up.
Dealers using MotoRate have seen a 16% increase in acceptance levels for financing proposals under the New Way of Working, compared to the previous pricing model.
This increase contrasts with data from the Finance and Leasing Association (FLA) which shows used car financing volumes fell 15% in the first quarter of 2021.
MotoNovo Managing Director Mark Standish said: “Dealers who embrace the model are welcoming more financial customers and increasing their level of acceptance.
“The performance gain is primarily related to the newly established ability of dealers to meet the financial needs of better quality customers at a competitive rate.
“The model provides more reasons for more customers to choose a car and finance themselves from a dealership and it creates good results for everyone involved.”
Operationally, Franks says the changes FCA introduced have not had a negative impact on the customer journey.
Alphera already had a number of dealer group customers who were working with a fixed rate commission structure, so there was a story they could build on with new partners moving to the new way of working.
Franks adds, “When we had partners who were a little leery of change, we could point out that we had already done this and it had not hurt, but improved business processes because of the level. increased transparency for customers.
“It was a hell of a job for the internal team to sort out the changes, but it’s been going well since then.
“We consulted and had early discussions to make sure dealers had their processes and procedures modified and ready to go.
“We phased out the rollout, so we already had a lot of groups on the flat rate system by the end of January.”
DISCLOSURE BY THE COMMISSION
Another area of change from Jan. 28 was that dealers must “visibly” disclose that they are receiving a commission for arranging financing.
This has raised concerns that customers will start asking more questions about the level of commission received per transaction.
However, there is some positive anecdotal news from Alphera’s perspective.
Franks says, “We don’t have any feedback that a lot of clients are asking about commission disclosure.
“Some retailers had been asked by customers about it, but that wasn’t until around the time it was announced.
“Since then, it hasn’t been a problem.
Franks says the changes to commission disclosure weren’t “onerous” and needed only adjustments, rather than a complete rewrite of the sales process.
Lawgistics legal adviser John McDougall pointed out that some of the firm’s reseller clients have been contacted by attorneys since January 28 after hinting that historic funding deals have been mis-sold and clients are not being informed of the financing commission.
McDougall says, “Letters are being sent to our members asking them to disclose confidential commission information that was not requested by the client at the appropriate time.
“We noticed that this confused many of our members. “
McDougall said that, like most FCA rules and guidelines, it hasn’t been prescriptive about what retailers should and shouldn’t do with regards to commission disclosure, so the changes are “very subjective”.
He says, “Showing the commission disclosure prominently for one member may be totally different for another.
“A franchise dealership with many manufacturers finance companies versus an independent dealer using only a few lenders can do things in a whole different way. “
FCA’s own guidelines state: “A business shall give due consideration to the information needs of its customers and communicate information to them in a clear, fair and non-misleading manner.”
McDougall adds, “Remember that the lender has a responsibility in this area to take reasonable steps to ensure that others acting on their behalf comply with FCA regulations.
PREPARATIONS FOR SEPTEMBER
Starting in September this year, the FCA will conduct point-of-sale mystery investigation exercises to measure lender control over dealer networks and ensure compliance.
From that point on, the FCA will gather evidence to determine if its measures are working the way they envisioned to save that £ 165million a year.
Franks says, “Our compliance monitoring team makes sure all staff understand the rules, performing regular compliance checks and analyzing reports to ensure our ‘one rate, one commission’ model is being adhered to. .
Alphera recently launched an online finance and insurance training program called “Funding Essential Skills” to serve as a refresher course for new hires or F&I sales specialists who are returning to work after leave and who may not have been introduced to the new commission model.
Franks adds, “Teething issues are to be expected with any significant change in the industry, but we make sure our partners are well equipped to handle any potential issues.
“In addition to compliance checks, we are working to ensure that any minor issues are detected and resolved before FCA reviews start. “
Dealer group boss who preferred not to be named says there has been an impact on average commission income, but this was offset by the fact that there have been higher funding volumes .
However, the boss expressed concern that if it turned out that dealers’ financial incomes were not changing drastically, or that the new FCA rules were not creating an overwhelmingly positive impact for consumers, d other changes may occur.
The boss says, “The FCA looks for average commissions that can drop by several million pounds each year and the easiest way to find out is to ask each of the finance companies for their numbers.
“I think September will likely focus on the details of the financial promotion itself and how commission disclosure is handled. If the FCA doesn’t believe the measures have worked, the industry will face full disclosure during the sales process.