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Motor dealers – what to look out for
Aside from the consumer duty (for which I’ve now published a book: ‘A Practical Guide to the Financial Conduct Authority (FCA) Consumer Duty’ by Robert Bell – Law Brief Publishing) the compliance “hot topics” of the year belong to motor dealers. The focus has been fairly intense, leaving many dealers to, understandably, question how fair this is. Nevertheless, it has highlighted to the industry just how important it is to align your practices with the principles, rules and guidelines of the Financial Conduct Authority (FCA).
The motor dealers we work with are therefore currently undertaking a root and branch review of their activities. They are revisiting their relationships with lenders, reviewing commission structures and looking at their sales journey. We’ll explore why the first two areas are important later on in the article but first let’s consider the importance of reviewing the sales journey.
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Credit brokers and insurance intermediaries previously relied on the providers of the product for much of their compliance and customer protection. It was accepted that lenders would be responsible for creditworthiness assessments, identifying and handling financial difficulties, vulnerability and compliance with the surviving requirements under Consumer Credit Act 1974. Brokers would, often, defer compliance decisions to the lender, simply following their instructions.
Over the last two years it has become clear that this approach does not sit within the expectations of the FCA. For example, when we submit authorisation applications on behalf of credit brokers, we can see the authorisation team analysing the business plan to ascertain the methods used by the dealer to identify vulnerability during the sales interaction, be aware of indicators of financial difficulties and have a clear policy in place to handle situations where it appears that difficulties may be present. Essentially, they are looking for brokers to take more of the responsibility. Whilst they accept the detailed creditworthiness checks, such as credit checks, will be conducted by the lender they do expect that brokers are able to identify situations where credit would not be appropriate.
Vulnerability is also a difficult topic for a lot of dealers, the showroom is not the ideal place to identify and support vulnerable customers. However, this does not mean the topic should be shied away from, dealers do have to look for signs of vulnerability during customer interaction and then take steps to support those customers. Too often I hear of dealers assuming that vulnerability means a customer cannot be provided with credit, insurance or even the vehicle, this is categorically wrong. It’s imperative that they understand their role is not to prevent sales based on an identified vulnerability (unless the vulnerability was so severe the customer did not understand what they were buying) but, instead, to support the customer through the process. This links in with the changes which should have happened under the Consumer Duty.
The Consumer Duty
The Consumer Duty has prompted manufacturers (typically lenders / insurers) to tighten their product governance framework. They have completed product reviews where the target market for the product is drawn out, the typical characteristics of customers in that target market identified and steps to prevent customers with those characteristics (including vulnerabilities) from being harmed. As such credit brokers, including dealers, will have had greater guidance from lenders on exactly how to distribute the product. This guidance should include instructions on the form and content of communications, designed and tested to ensure that customers in the target market are provided with the right information at the right time.
Typically, these instructions will include provision for vulnerable customers, providing information in a different format or frequency to aid their understanding. This requires those working in dealers to have a greater awareness of vulnerability and the options available to adjust communication. It is no longer the case that they can simply pass customers over to the lender for them to handle, or trust the lender will pick up on the customer’s situation post-sale. Instead, they must be proactively identifying and reacting to a customer’s vulnerability to support their understanding during the sale.
Aside from the Consumer Duty and general direction of regulatory expectations there have been two further areas for motor dealers to consider.
Gap Insurance
In February this year the FCA announced that multiple insurance firms had agreed to pause the sale of GAP insurance due to concerns raised by the regulator in respect of fair value. They had used regulatory return data to identify that only 6% of premiums paid by customers were, on average, paid in claims: far lower than for other insurance products. This indicated customers were not receiving fair value, especially when, in some cases, commission for sales made up the majority of the income received from the product.
In May this year those firms were able to start selling the product again as long as they demonstrate fair value, the latest FCA update is here.
Discretionary Commission Arrangements
I won’t complete the back-story behind DCAs as I’m sure you’ll be aware by now, but you can read more about this here.
On 24th September 2024 we did get an update from the FCA and as expected, they have confirmed the extension to the pause in providing final responses to customer complaints regarding DCAs in motor finance until December 2025.The FCA looks to be waiting until May 2025 before issuing its next update. This is because the FCA needs more time to complete its review and diagnostic work, to fully understand the impact the issue has had on customers and a number of court cases, including Barclays judicial review, will be known. The FCA confirms that it is too early to say what the final outcome will be, but a consumer redress scheme is more likely now than it was at the start of the FCA review. Also, don’t forget about the FCA’s Dear CEO letter where they reminded firms about adequate financial resources.
Appointed Representatives
Those using ARs may want to consider this paper published by the FCA.
What’s next?
With the intense focus on motor dealers there is no time to lose to ensure that your activities are aligned with FCA expectations, we’re happy to assist with your review so I’m offering a free 2 hour consultation, guiding you on how to conduct the review, helping ensure the key areas are included. This offer is limited to the first five companies to book.
If you’re interested email me at: Robert.bell@rbcompliance.co.uk
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