The FCA update made for some interest ing reading
After all the hubbub we heard last year around motor finance, it was refreshing for the Financial Conduct Authority to finally put out an update on its Motor Finance Exploratory Review in March.
Overall, it is safe to say the update painted a much calmer picture than one might have expected given all the noise made when the regulator announced its review in its business plan back in 2017, but I do not think that means lenders and dealers can relax.
There are three areas that could raise potential alarm bells. The first is the attitude of the regulator towards the subprime. The FCA made a point of the fact that there are generally higher default and arrears rates among customers with lower credit ratings. While this might not be a stunning revelation to anyone who understands how credit works, what is a worry is that these rates have apparently been climbing over recent years – despite the economy remaining relatively calm during the period. It seems likely the FCA is going to be keeping an extra close eye on this niche in the market.
The second area of concern the FCA raised was around the potential for customer harm if dealer commission is linked to the rates customers are charged. This was something the FCA had mentioned as an area of concern back in its business plan, but these thoughts look to have been further developed. While the regulator stopped short of saying it planned to ban linking interest and commission, it did make it clear that anyone doing this needs to have some pretty strong controls and processes in place to make sure the customer still gets the best deal.
The final part is a mystery shopper exercise the FCA plans to conduct. I suspect this could end up being the most revealing part of the FCA’s review. One of the quirks of the motor finance industry is that it is almost entirely sold through intermediaries, be it a dealer or a broker. There are thousands of dealers across the country, meaning potentially tens of thousands of car sales staff. Are they all selling finance to the same standard? It seems unlikely.
If a customer comes in and asks about a PCP deal, do 100% of all dealers make sure the mileage limits suit the customer, even if it means the car they want becomes no longer affordable, meaning a potential lost sale. Or might a few of them try and get the customer reduce the mileage limits in order to bring down the monthly payments to something acceptable?
No matter how many controls lenders put in place, it is not hard to imagine the above scenario occurring. And the FCA will likely take an extremely dim view of it if it comes across this behaviour during the mystery shopper exercise. If the FCA does find examples of such sales tactics who will it hold responsible: the dealer, the lender, or both?
The final report, due out in September, could make for some very interesting reading.
Jonathan Minter, Editor