Despite predictions of a strong year once again fuelled by PCP funding, motor retail faces political and economic uncertainty as the UK begins to lay out its Brexit strategy and the landscape continues to shift with legislation and market disruptors all influencing dealers’ F&I business.
The industry faces further scrutiny from the Financial Conduct Authority (FCA), which announced an exploratory enquiry into motor finance, highlighting potential conflicts of interest and irresponsible lending, in its 2017/18 business plan.
However, dealers can take measures to prepare for both the known – such as existing regulations – and, to a certain extent, the unknown, such as an FCA consultation and the Brexit effect.
Brokers offering attractive finance rates without the overheads demanded of dealers have long been an issue, but Andrew Smith, consumer credit director of FCA compliance consultancy Compliancy Services, believes they could give retailers an opportunity.
“Rather than competing with the brokers, dealers should align themselves with them and have a trusted and formally engaged panel of brokers with whom they have a relationship,” he said.
“Each party wins – the dealers have an additional revenue stream as business is introduced via them to their manufacturer finance partners, plus the brokers would have access to additional funding sources. Additionally, the dealer then has the chance of retaining the customer for ongoing work.
“However, transparency is imperative and the customer has to be made aware of the relationship between the broker and dealer, and who is providing the funding.
“Aligning themselves with the larger brokers, they extend their access to finance products at the best rates. The flip side of this is the dealership may have a direct funding facility with a manufacturer finance provider at rates the broker cannot obtain, hence the need to work together.”
Spencer Halil, director at Alphera Financial Services, thinks part of the solution is to incorporate more digital tools, such as vehicle configurators and online PCP calculators.
He said: “If you compare a PCP with a personal loan, on the face of it the loan can look to have the more favourable rates, but the cheapest rate is not always the best product for the customer.
“I think the reason brokers have been gaining momentum is because we have been too traditional in our face-to-face delivery. We have an advantage over brokers in that we can amalgamate the finance product with the brand. Say a customer has configured a BMW as well as a finance quote, if they change the specification, the quote will also update. It’s unlikely a broker will be able to achieve anything like that in the digital space.”
F&I product portfolio
Broadening and enhancing product portfolios may provide additional F&I income.
Halil said: “Most customers are catered for through HP or PCP. We have been more focused on extending the parameters of the product, such as lengthening the term to cater for wider customer needs and not necessarily providing new products.
“What we can do is create new platforms for the presentation of these products. F&I would benefit from more channel development. The sales process is not linear, but supports layers of
interaction, many of which are happening at the same time. We need the functionality to meet the customer’s agenda.”
Smith said: “There is lots of opportunity around products such as extended warranty and add-on insurance. We work with many clients looking at new products such as to finance unexpected service, maintenance and repair costs, particularly for used vehicles. Arguably, this sits well with the FCA’s treating customers fairly principle because these dealers are providing customers with a way to keep their car in the best condition.”
Martin Hill, managing director of DealTrak, said: “You need to look at other products and F&I offerings as part of a balanced approach. This could be selling a number of products possibly over the course of a month or even the life cycle of the car ownership rather than concentrating on one hit in the showroom.”
Dealers who opted for limited permissions may not have the right processes in place to satisfy the FCA. Martin Hill, managing director of technology provider DealTrak, estimates about 5,000-8,000 small-to medium-sized dealer groups in the UK have limited permissions, but are unlikely to have all the required systems and controls in place.
Hill said: “I think it’s a real issue. Becoming an appointed representative is a viable option but as well as having the systems for TCF, they must also deliver that consistently. You have to be able to evidence that if someone buys a car at your Aylesbury site, they receive the same treatment as a customer who purchases in Aberdeen. That is notoriously difficult to achieve unless you have a fully integrated system.”
In what it claims is a first for the market, DealTrak has partnered with ITC Compliance, which provides appointed representative status for general insurance and consumer credit, to offer dealers compliance services and a fully integrated system. The new system is due to be launched this summer.
Smith said: “Many dealerships are appointed representatives of a compliance provider, but while it makes compliance easier and the systems are all in place, it is not necessarily in a dealer’s best interests.
“The compliance provider cannot necessarily provide them with exclusive finance rates enjoyed by brokers. It’s mutually better to have the dealerships and brokers working together to allow both to have access to funding options that neither would be able to access on their own.
“A lot of these types of relationships are going on, but may not have been formalised. Not having these processes formalised, documented and the customer being fully aware, exposes all involved to the risk of breaching both the FCA and ICO (Information Commissioner’s Office) rules.”
Staff training and tracking
An extensive F&I training and development plan can ensure employees have the skills they need to deliver TCF.
Citygate does not employ business managers, so all sales executives sell F&I products after undertaking a Specialist Automotive Finance (SAF) module online, which is refreshed annually.
Compliance manager Emily Leigh-Dugmore said: “Sales staff are not allowed on the showroom floor if they haven’t completed the modules. If a sales executive does not repeat the module when required, I pull them off the showroom floor and they are not allowed back until it has been completed.”
To keep track of F&I decisions made by staff, Leigh-Dugmore provides a ‘dashboard’ to senior managers, collating information from a range of sources, including tracking any errors to identify trends or additional training requirements. The ‘dashboard’ also highlights the number of ‘right of withdrawal’, or ROW, when a finance product is taken out, but the customer changes their mind, which could indicate mis-selling. However, many switched-on customers opt for finance to take advantage of a manufacturer deposit contribution before cancelling and paying for the vehicle in full which can complicate the picture for the dealer and potentially the regulator.
With fears that PCP could become the next PPI as mis-sold claims appear, Citygate asks customers to sign an additional form, which highlights product features and states that the customer understands the elements of the agreement. In the past 18 months, the group has experienced a handful of such claims, but as a result of the form, the Financial Ombudsman has found in its favour.
According to a survey by the IMI, which has developed its own F&I accreditation programme, when 2,000 people were questioned in December on potential mis-selling of F&I products, 45% of drivers said they felt pressured to buy add-ons by a salesperson.
Steve Nash, IMI CEO said: “Our research highlighted that 63% of car buyers find the process of buying a car stressful. This underlines why it’s the right time for the industry to take more responsibility to ensure anybody selling finance and insurance products has the correct training to be able to help drivers decide whether or not they would like to buy these extras when purchasing a vehicle.”
Alphera is currently exploring a partnership with an education provider in the industry with the aim of providing a recognised accredited programme.
Halil said: “Staff training is one of the most important endeavours for a finance company and will become more important in the future. It’s very unusual in a highly regulated environment that the person selling the product does not need accreditation. I do think the FCA will be expecting all authorised businesses to be able to demonstrate a good standard and a properly implemented training programme.”