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The used car market has never seen anything quite like this. Since dealerships started to come out of lockdown from June, demand for used cars has chased supply with cars getting snapped up faster than anyone could have imagined.

This demand for used cars remains high which is good, but supply is under pressure and that presents challenges. Factor in the variables associated with an economy facing further lockdowns and a possible recession, and the future could seem a little volatile.

Yet even in bad times people still need personal mobility and buy used cars. We saw that a decade ago during the financial crisis, where the dealer bounce back was powered by used car sales.

We are seeing it now. For evidence, look no further than the first batch of City updates showing used sales leading the recovery of the listed franchised groups. An experience echoed by privately owned groups and the independent sector where alternative revenue stream options are limited or non-existent.

So, where is the demand coming from? This is where things start to get interesting. Along with customers who will only buy used cars, the numbers have grown with new types of buyers entering the market.

The March lockdown happened during the busiest week of the busiest month of the year for franchised dealers. Buyers in the market for a shiny new 20-plate model faced a dilemma: do they join a long wait for a new car as car factories around the world cranked back into life, hold out until the September plate-change or dip their toes into the used market?

For those who could not wait, buying used became the only option. Consequently, when forecourts reopened nearly-new cars were snapped up as a result of a notable shift from new to used.

For many dealers Brexit proved to be an unexpected saviour. At the turn of the year, carmakers planning to get ahead of any possible Brexit disruption ordered higher than normal volumes of new cars to keep dealers supplied with readily accessible inventory. This proved to be a good move!

Since lockdown was lifted these vehicles have provided a welcome supply of nearly-new cars, with minimal mileage, to former new car buyers prepared to compromise on not being able to choose the precise spec for their next car.

The Covid-19 pandemic has seen new buzzwords and phrases drop into our vocabulary; Zoom, furlough, social distancing, R-number, Test and Trace. A recent addition has been “revenge buying”; neatly encapsulating the desire to spend on a big ticket item for those feeling deprived of retail therapy.

As a result, cars (used and new) have been purchased by buyers realising a foreign summer holiday this year had become impossible because of travel and quarantine restrictions.

While this has been a welcome development for car dealers across the country, it has also added to the high levels of pent-up demand for used cars.

With places of work gradually reopening, many commuters have asked themselves whether they are prepared to share their personal space with fellow public transport users. Even allowing for social distancing rules and mandatory masks, the thought of returning to trains, buses and trams has prompted many to consider buying a used car instead.

Consequently, many dealers have seen a welcome influx of first time, or long absent, buyers on their forecourts searching for affordable cars to solve their commuting concerns.

An easy sell for dealers with older small cars on their forecourts.

The arrival of all these new buyers coming into the used car market is a welcome development in these uncertain and fast changing times.

The frustration and challenge facing dealers over the coming months will be to source the stock they know will resonate with customers because supplies are limited and competition is fierce.

The September plate-change should boost the churn of used cars with a mixture of part-exchanges being retailed and high volumes of three-year-old PCP funded cars entering the used market.

In the battle for the hearts of minds of used car buyers, the winners will be those dealers able to source the right stock, pricing it to market and delivering the highest possible levels of customer satisfaction.

Since dealerships reopened their doors, demand for used cars has sky rocketed. From revenge buyers to those wanting to avoid public transport, dealers will need to stay on top of their stock to keep up with this pent-up demand...


The buyer shift to used cars

The FCA Policy Statement means that the industry must prepare for significant change to finance commission models. Already, MotoNovo Finance has demonstrated that one of the two potential options referenced by the FCA, risk-based pricing, which is at the heart of the business’ MotoRate model, can deliver significant positives for many dealers and these are not only revenue benefits.  

All discretionary commission models for finance will be banned from January 28th;

New commission models must avoid anything that looks like a discretionary commission arrangement, a definition that the regulator notes; ‘should be interpreted broadly.’

While the FCA does not specify what is acceptable as a commission model, they have noted; ‘It could include firms moving to risk based pricing, provided the broker is not incentivised to set or adjust the rate charged. It could include flat fee models.’

Reflecting upon the FCA changes ahead, Deputy CEO Karl Werner is clear that lenders and dealers have a duty of care to honour the spirit and letter of the FCA Policy Statement to protect car buyers and the broader dealer finance industry noting;

“The dealer finance model needs to be reinvented to meet the FCA’s requirements in full. There is no place for body-swerves or gamification that might replicate any part of the soon-to-be banned dealer discretion. Such a move would only serve to damage the reputation of dealer finance and encourage damaging claims management company activity. 

“The changes required are an opportunity to demonstrate to the broad public the industry’s commitment to business cultures centred upon doing the right thing for customers. This principle is also an integral part of the FCA’s SM&CR responsibilities for senior leaders in dealerships and lenders. How we react to the test of embracing, not just the letter, but spirt of the FCA’s Policy Statement stands to have a big part in the future of dealer finance.”

Karl is clear that embracing the FCA’s mandate for change has the potential to be positive. It is something that has been reflected in very encouraging dealer feedback to MotoRate as he concludes:

“We see the required FCA changes as a significant opportunity to increase customer trust, finance penetration and income for many dealers. Going further, MotoRate and its headline APR rates and customer specific pricing approach are ideally suited to support the move to online sales accelerated by COVID-19. The experience over the last three months is that not only has MotoRate taken the traditional friction out of dealer finance, but it has also encouraged dealers to talk openly and positively about another FCA priority, commission disclosure. 

“De-mystifying finance and trust-building have to be positives for the future of dealer finance. I am open to debate on alternative models, but every alternative must put every customers’ best interests at the forefront of the discussion.”

Press release issued by MotoNovo Finance, September 2020

Reflecting upon the changes ahead stated in the FCA Policy Statement, Deputy CEO Karl Werner is clear that lenders and dealers have a duty to protect car buyers and the broader dealer finance industry...

The opportunity of embracing FCA mandated pricing changes

The Financial Conduct Authority (FCA) announced its ban on all discretionary commission models that will come into play from January 28th, but it is not the only change that the FCA announcement will create.

The FCA announcement signals three main developments;

A ban on Discretionary Commission arrangements

A move to increase transparency on commission disclosure

A ban on discretionary commission pricing models 

To quote the FCA; “discretionary commission models are those whereby the amount the broker (dealer) receives (in commission) is linked to the rate that the customer pays and which the broker has the power to set or adjust.”  Commission refers to any form of financial benefit accruing to the dealer. In short, dealers will no longer have the discretion to set interest rates on finance that could be used to enhance dealer commission.

Dealers must move their finance and business model away from anything that could be considered to be a discretionary commission model. Traditionally, this was led by so-called DIC (Difference in Charges) and Scaled Commission finance models.

It is over to lenders and dealers to negotiate alternative compliant commission structures. The FCA has referenced some options, including risk based pricing and flat fee models. It will be interesting to see what, if any, viable pricing alternatives surface in the weeks ahead, beyond the two outlined by the regulator.

What are the rules around commission disclosure?

The FCA points to minor changes in commission disclosure. However, since the regulator also points to the fact that their work identified; “a high incidence of firms not complying with some of our existing rules and guidance on the information they should disclose to customers”, dealers would be advised to view that those changes could be significant and even very significant. 

I veer towards ‘very significant’ for two reasons:

According to the FCA during their mystery shopping exercise, many dealers were not complaint with commission disclosure requirement

Come 28th January 2021, dealers will also have to disclose the ‘nature’ of the commission arrangement and how this impacts the amount payable by the customer  

Dealers will need to look beyond the headlines to discover this one. The telling section that underlines an increased responsibility role for lenders is in the FCA’s Measuring Success section of the FCA’s policy statement:

“We will also carry out a point-of-sale mystery shop exercise to measure lenders’ control over dealer networks. This work will assess whether firms, where they are required to, have taken appropriate steps to ensure dealers/brokers comply with relevant regulatory requirements.”

In a world of SM&CR accountability, dealers and lenders will need to collaborate to ensure compliance and assist one another.  

There are risks, but there are also positives for the changes ahead;

Creating a lending environment whereby brokers are not rewarded or incentivised for charging consumers higher interest rates will provide consumers with more confidence in the sector and encourage them to fund their vehicle purchases through dealers rather than utilising other forms of lending such as bank loans.

The overall conclusion is that while many dealers have moved away from discretionary pricing models, they may have to look again and certainly, a review of commission disclosure will need to be on the agenda. A very obvious development will be the role of lenders, quite how they will ensure dealer compliance is unclear, not least of all because of the multi-lender scenario in common usage. Finally, dealers with low finance penetration have much to gain and the position for dealers where finance is a major profit centre will see that this change will continue to provide good outcomes for all.  

The FCA announced its ban on all discretionary commission models that will come into play from January 28th, but it's not the only change that the FCA announcement will create. Industry expert, Debbie Kirlew explains...

New FCA rules - what is it, what does it mean

If there’s one thing lockdown has taught us, it’s the ease and efficiency of digital tools and communications.

Customers, very much used to making and managing their purchases remotely in other areas from holidays to white goods, discovered that whether they were looking for a new or used car, or needed to book their car in for a service, it was all doable online. 

Sales executives also realised that while the traditional view of touching a car and backsides on seats meant a firm sale, this could also be achieved by embracing digital tools and communications, customers were just as likely, if not more likely, to sign on the dotted line.

The realisation for both dealers and car buyers dawned in the wake of the pandemic that face-to-face contact isn’t always necessary. It will mean a return to old practices, which invariably saw consumers funnelled into the showroom at the earliest opportunity are increasingly unlikely.

A host of digital tools such as video explainers and video walk-rounds, online finance applications and approvals, secure digital documentation systems and live chat were already in place for a lot of dealerships before the pandemic hit. Dealers who had these practices in place were able to continue conversations with customers, despite shutting their physical doors during the lockdown.

We’ve all emerged from lockdown much more comfortable with video conferencing and meetings whilst the entire nation has indulged in Zoom parties and virtual exercise classes. We are now much happier utilising technology to communicate and are more reliant on digital tools to undertake tasks we would have usually done in person. Click and collect, for example, has become far more commonplace and we’re even scanning menus in restaurants and codes in pubs to order food and drink and paying using our smartphones.  However, many of us are still reluctant to completely relax social distancing measures which means digital processes will play an even greater role in all aspects of our lives including how we buy our cars moving forward. 

Whilst video of used car stock on the dealer’s website and personally recorded videos responding to customer enquiries will continue, we can expect to see more two-way video conversations taking place. These allow customers to ask questions and sales executives can even carry out virtual part-exchange evaluations all on the same call.

Throughout the lockdown, digital suppliers to the sector were keen to help dealers maintain contact with customers with many providing services free or accelerating the development of new products. As the pandemic forced dealers to extend its digital processes that even suppliers didn’t expect, it has effectively fast-forwarded the sector by several years and there will be no going back.

As ‘normality’ slowly returns, albeit a new normal, there will always be some customers who are much more comfortable conducting transactions in person, but it seems very possible that many will be happy continuing their car buying journey online, arranging their finance using dealer tools and signing documents digitally. This will become more apparent as Generation Z, those born in the late 90s and the first decade of the new century, ages and they make vehicle purchases in greater numbers.

Alongside these developments, dealers will also need a team with digital skill-sets rather than sales executives who sit people down at their desk to close the deal.

The contactless experience will form much more of the buying process including test drives from home, digital documentation signing and video explainers along with elements of the purchase itself, the final transaction and even the vehicle handover. 

Dealers and customers could well be asking themselves if it’s necessary to conduct any of the processes in the showroom. Covid-19 could prove to be the watershed for the digital transformation in automotive retail for which customers have long been waiting for.

Throughout the pandemic, online platforms have been a lifeline for dealers to continue communicating with customers. Industry expert, Debbie Kirlew sums up how this digital transformation in automotive retail has been a long time coming…

News - September 2020

The buyer shift to used cars

The opportunity of embracing FCA mandated pricing changes

New FCA rules - what is it, what does it mean

The art of remote communication - the great coronavirus lesson

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