THE latest FCA Consultation Paper announcement marks the move from traditional motor finance commission models to an approach that provides more positive outcomes to car buyers.
The FCA has confirmed its intention to remove dealer discretion to set customer interest rates as a way of increasing the commission they can earn.
This is a significant shift from what has been a long-established model and will see the need for the sector to re-examine pricing strategies to ensure good customer outcomes are central to dealer’s cultural model and are delivered.
Martin Hill, Managing Director of Leeds-based automotive fintech firm DealTrak, has looked 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.
Hill said: “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.
Hill added: “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 right buyer with the right product.”
Commission and mandatory disclosure
It’s 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.
Hill said: “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?
Hill said that 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 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.”
MotoNovo Finance Chief Executive Mark Standish said the FCA’s announcement points to fundamental changes in the commission model, with a dealer’s capacity to set customer interest rates to be banned.
He said: “It’s exactly what we predicted back in March; where we thought that significant change was likely and now see this as a unique opportunity for the dealer sales and financing model to reinvent itself, making it both trusted by, and relevant to, today’s highly informed and protected car buyer.
“Rather than achieving used car finance penetration of as low as 20%, let’s use the opportunity to aim higher and ensure the dealer, both physically and digitally, is vital to the used car buying and financing journey.”
Since the FCA released its Motor Finance review in March, MotoNovo has made substantial investment in new financing models, technologies and dealer support, in anticipation of significant regulatory change.
Embrace risk-based pricing
Standish said that central to MotoNovo’s approach has been a move to embrace risk-based pricing, a development it believes the FCA will welcome.
In Q4, MotoNovo will be increasing its pilot of risk-based pricing models across dealerships. Additionally, dealers and car buyers alike will be able to benefit from major new investment by MotoNovo in its dealer finance-led marketplace model, findandfundmtcar.com, a service that was conceived as a way of helping dealers to use finance in a compliant manner to promote car sales.
Additional development in customer self-serve finance access, an area in which MotoNovo is already the market leader, will assist dealers in developing an omni-channel car financing capability.
Standish added: “Used vehicle dealer finance can become far more important for dealers. To realise this ambition, the industry must re-boot.
“At the heart of our approach to support dealers in doing the right thing, we are already rolling out our Triple Win approach. This champions a financing philosophy that works for car buyers, dealers and ourselves.
“It is designed to drive used car finance up and place used car financing and sales together.”
