Consumer Duty: FCA sees ‘challenges around control of dealer networks’

The FCA wrote to finance houses in March flagging up the challenges ahead for dealer networks and Consumer Duty

Last year the Financial Conduct Authority (FCA) published the final rules and guidance for motor finance firms on its new Consumer Duty rules. The rules come into force on 31 July 2023 for new and existing products or services that are open to sale or renewal, and 31 July 2024 for closed products or services.

These new rules set higher and clearer standards of consumer protection across financial services and require motor finance firms, brokers and dealers to put their customers’ needs first. It will mean that consumers should receive communications they can understand, products and services that meet their needs and offer fair value, and they get the customer support they need, when they need it.

Market challenges

The Consumer Duty applies across the finance sector but as the deadline approaches the FCA said in a letter to motor finance firms in March it had concerns with dealer implementation. The letter set out the state of play for motor finance houses, brokers and dealers.

“We continue to see challenges for the market, particularly around the control of dealer networks and oversight of these by the lender, with particular reference to the adequacy of point-of-sale information and changes in the market, for instance increasing sales of Alternative Fuel Vehicles (AFVs), the shift in consumer behaviour from ownership to usership and increased digitalisation of the customer journey.”

It also said that dealers and brokers and finance houses need to be clear on their roles and contractual obligations.

“As an example, if a lender negotiates an APR price-point with a dealer or broker firm, the firms may need to consider whether the lender is making the pricing decisions or if the dealer or broker has a material influence on this.

“Where firms collaborate in this way, they must have a written agreement outlining their respective roles and responsibilities to comply with the rules in this section. We expect the agreement to be a confirmation of which firm is responsible for meeting different aspects of the rules under this outcome. So, in the event of a problem, it is clear which firm is accountable.”

Commission models

The FCA is also looking closely at commission models and how they are implemented. There had been speculation that this could lead to full disclosure. In the property sector mortgage companies have disclosed the commission they make on deals for over a decade. Dealers do not.

Currently, dealers have to tell consumers that they do take a commission but do not have to disclose it unless specifically asked by the consumers. Very few customers do.

The FCA said: “Certain commission models may cause consumer harm without appropriate oversight in place and create potential conflicts of interests for sales staff or agents. Consumers may be in more vulnerable circumstances where the need for the goods or services being supplied may mean that insufficient focus is given to the credit agreement being arranged to facilitate the purchase.

“We are also focusing attention on whether our ban on discretionary commission models in motor finance and amendments to commission disclosure rules are being complied with by both lenders and credit brokers, including motor dealers.”

According to the FCA motor firms will need to ensure that the lending product provides “fair value” to retail customers.

It gives the example of being able to demonstrate that any fees for exceeding mileage limits and wear and tear are suitable and that consumers are not unfairly penalised for terminating Personal Contract Hire (PCH) agreements early.

 

Point of sale

The regulator said that motor finance providers needed to monitor dealer networks, paying attention to the point of sale.

“Motor finance providers need to have adequate oversight of dealer/broker networks and monitor point of sale compliance with our Consumer Credit Sourcebook (CONC) rules.

“Where dealers use non-compliant financial promotions it can result in consumers being unable to make informed decisions and purchasing financial products that aren’t suitable.

“Further, as more dealers/brokers move from in-person sales to digital based sales, firms will need to adjust their oversight models to ensure they are monitoring their network appropriately and that the correct information is being provided through digital channels.”

One element that has come to the fore is the cost of living crisis, which has impacted households and their ability to fund their car purchase. Some consumers, vulnerable before the crisis, are now even more so.

 

Cost-of-living crisis

“While our work on the Duty pre-dates the cost-of-living crisis, it is particularly important as consumers face increasing pressures on their household finances. Even before the crisis, consumers were being asked to make an increasing number of complex and important decisions in a faster and increasingly complex environment.

“But the crisis underlines the need for high standards and strong protections. It is more important than ever that consumers can make informed, effective decisions, act in their interests and pursue their financial objectives,” it said.

In January this year the FCA said that some firms are behind in their planning for the new Consumer Duty rules.

Sheldon Mills, executive director of Consumers and Competition at the FCA, said: ‘The Consumer Duty will bring about a step change in the way financial services firms treat their customers and we welcome the work firms are doing to implement it.

“Given the scale of the reform, we recognise that some firms need to make significant changes. For firms that are further behind in making the necessary changes, there is time to put that right and for them to show they are acting in the spirit of the new Duty.

“Firms will also see the benefits of the Duty, with increased trust in the sector, more flexibility to innovate and in time fewer rule changes.”

 

Digital processes

The FCA referred to the increased use of digital processes and systems to monitor finance.

One tech firm iVendi argues that compiling accurate and timely management information (MI) will be crucial for dealers and lenders in meeting the FCA’s new Consumer Duty responsibilities.

It said that proving customer needs were being put first could only be achieved by having systems and processes in place.

Rob Severs, senior VP product and Insight at the motor retail technology group, said: “Management information will play a key part in helping both lenders and retailers prove compliance and show continuous improvement when it comes to Consumer Duty.

“It provides the data and insight to help better understand how good vehicle buyer outcomes are being delivered and where improvements need to be made.”

Examples of MI which should be tracked for the motor retail sector included the volume of rejections, complaints, customer feedback and outcomes of sales reviews, he said.

According to Severs, the key for dealers was to identify the right metrics for their business introducing processes that ensure they are accurately measured and regularly monitored, with clear lines of responsibility.

“Our advice is that dealers and lenders make a checklist to ensure that the MI they are compiling meets basic requirements. Tracking Consumer Duty MI could potentially be done manually but, as with any process of this kind, technology will deliver exponentially more effective results with greater accuracy and speed available in reporting formats that are easy to understand.

“We are already working with motor retailers and lenders to put these in place. Because of our systems and our experience, this has the added bonus of ensuring not just that the new FCA guidelines are being met but also data protection and consumer rights laws and regulations. All compliance needs are gathered in one place,” he said.