Last month, the Financial Conduct Authority (FCA) announced plans to ban the way in which some car retailers, and other motor finance brokers, receive commission – specifically that linked to the customer interest rate. Sean Kulan, consumer credit sector lead at Huntswood, writes.
By removing the financial incentive for brokers to raise interest rates on prices, the regulator is estimating that these changes could save customers £165m a year, as well as giving lenders more control over the prices that their customers pay for motor finance products.
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To help rectify the widespread use of these commission models, the FCA is also proposing changes to the way in which customers are informed about brokers’ commission – with greater transparency allowing customers to make well-informed decisions which are in their best interest.
How to Respond
The FCA’s consultation opened on 15 October, and stakeholders are invited to provide feedback, before the deadline on 15 January 2020.
For lenders, now is the time to read and digest the FCA’s proposals when it comes to motor finance, and respond to the questions in the consultation. The final rules will be published later next year.
While these proposals should help to combat unfair pricing models, they will significantly impact the way that motor finance is delivered. With so many customers affected, there are already some claims management companies looking to target firms with retrospective complaints; as such, lenders must be prepared to deal with these.
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By GlobalDataThis means putting the right measures in place to handle a spike in customer enquiries and ensuring that they are completely transparent when it comes to disclosing historic arrangements.
In anticipation of the changes, motor businesses should also start reviewing existing systems and controls, and take proactive steps to ensure both compliance and good customer outcomes in future.
Making sure that staff understand the proposed rule changes and the need for clear communication moving forward is critical, as customers will now be looking for transparency when it comes to interest rates and the factors that influence them.
By having these open and frank conversations up front, businesses will be able to limit the need for potentially disruptive regulatory intervention down the line.
Vulnerable Customers
As the FCA’s recent interim study into the general insurance market confirmed, it is often vulnerable customers who are most at risk of unfair pricing.
Vulnerability can take many forms – in the FCA’s Financial Lives Survey, a staggering 50% of UK adults were found to display one or more characteristics of being potentially vulnerable. This includes those with life-long physical conditions and disability, as well as temporary life events such as divorce, redundancy and bereavement.
Protecting vulnerable consumers is a key priority for the FCA, and firms are therefore expected to have a robust vulnerability strategy in place to ensure any transactions are fair and just. To satisfy the regulator, motor finance companies will need to consider how they can best protect vulnerable customers and ensure that their interests are met effectively.
Ensuring that all communication, whether verbal or written, is not confusing or ambiguous will be particularly important when it comes engaging with vulnerable customers around these changes.
Culture and Outcomes
These plans from the FCA are likely be the first of several remedies implemented across the industry, with the regulator making it abundantly clear that it is committed to promoting competition, responsible lending and the fair treatment of consumers and is ready to take strong action to address perceived unfairness and poor outcomes.
Motor businesses should, therefore, see this as an opportunity to make sure that their business culture is aligned with both the regulator’s priorities and those of the end customer.
A commitment to doing the right thing should be deeply embedded in the culture of the business, and shared by everyone on the team in order to ensure regulatory compliance in future.
To achieve this, firms may need to invest in staff training to help raise awareness of what lending best practice looks like. Staff will need to be empowered to use their initiative and change their approach according to the needs of customers.
Putting customers at the heart of operations and processes will not only help firms avoid the financial and reputational damage that comes with non-compliance but, in an era of customer choice and social recommendations, it makes good business sense too.
by Sean Kulan
