The regulatory opportunity for dealer finance
- January 28th 2021 - a ban on discretionary commission models and commission disclosure changes come into force as required by the Financial Conduct Authority (FCA);
- March 31st 2021 - the deadline for solo-regulated firms* to have undertaken the first assessment of the fitness and propriety of their Certified Persons - delayed from December 9th 2020.
The changes ahead are potentially significant with the SMCR providing personal accountability to ensure dealers embrace them. The counterpoint is that as demonstrated by dealers switching to MotoNovo’s new MotoRate model, the impact can be transformative, delivering a positive game-changer for dealers.
This opportunity:
- New car finance penetration of retail sales in 2019 was 91.7%; used car penetration was in the 20 – 40% range typically;
- In 2019, there were 7.9 million used cars bought in the UK and a little over a million new cars purchased by private buyers;
- Finance sales from dealers switching to the MotoRate pricing show growth of over 70%.
There is scope for many dealers to improve their used car finance penetration. With MotoRate, circa 2,000 dealers are realising this potential in a way that embraces the type of finance pricing model that the FCA has identified could be included as the industry moves forward.
Motor finance changes
Right now, dealers need to develop the necessary pricing, processes and controls to meet the FCA changes mandated. At a very high-level, the crucial FCA changes for motor finance are:
- A ban on discretionary commission finance pricing models – a move designed to save finance consumers interest charges, which the FCA estimates at £165M a year. To quote the FCA; ‘breaking the link between customer interest rate and dealer earnings should reduce financing costs for consumers.’ The FCA identified two pricing models that could be considered by dealers; the type of risk-based pricing model that has been captured by MotoRate and flat-fee models;
- A greater level of transparency on commission disclosure – the existence and nature of finance commission must be revealed to the customer. The FCA also provided a broader definition of commission that defines it as; ‘any financial consideration payable directly or indirectly in connection with the regulated credit agreement’.
When combined, the FCA expects dealers to deliver a finance approach that is; transparent, fair and not misleading. It is a point they make evident to dealers in the following wording:
‘We are looking to ban any practice where a dealer is rewarded for adjusting the price a customer pays for motor finance. To prevent gaming we have deliberately not defined what is meant by financial consideration. Firms will need to satisfy themselves that they are acting within the rules and meeting our intention behind the ban.’
There will be a greater oversight role for lenders, but it is crucial that dealers recognise that in the majority of cases it will be they who will be held liable for delivering and sustaining a compliant F&I operation and this feeds into the SMCR.
The Senior Managers Certification Regime (SMCR)
The SMCR applies to every dealer/group offering financial services. A named person will be accountable and its scope includes everyone involved with F&I.
At its heart, the FCA expects to see the accountable SMCR people leading a culture that puts consumers before finance profits.
To sum up
The FCA is clear, they expect to see consumers’ financing costs reduce, but if dealers can use new lower rates in their marketing to create sales and increase finance penetration; dealers and their customers can both benefit from the change and dealers can be seen to embrace the change to minimise SMCR risks.
* Solo-regulated firms are those regulated by the FCA only. The SM&CR replaced the Approved Persons Regime from 9 December 2019.
Press release issued by MotoNovo Finance, October 2020