This February, the rolling 12-month total of new cars financed by members of the Finance and Leasing Association (FLA) by consumers in dealerships passed the one-million mark for the first time.
In 2015, 81.4% of private customers funded their new car purchase through dealer finance, up 10% year on year, while used car finance grew 9%, according to the FLA.
The trend for growth is continuing – point-of-sale consumer new car finance business grew 27% by value and 22% by volume in February, compared with the same month a year earlier.
Dealers’ adherence to the Financial Conduct Authority’s (FCA) regulations looms large over the point-of-sale finance process in the showroom. As the majority of retailers have got to grips with meeting compliance with FCA regulations, the spotlight is moving from authorisation to enforcement.
Kirk Franks, Alphera head of national sales, said: “The FCA changes have meant quite a lot of processes have changed at the point of sale.
“Dealers have to be really prudent, but it can only be seen as a positive. The sale process has become much more focused now, it gives customers more transparency.”
“Dealer finance can offer competitive pricing, affordability, flexibility, high acceptance rates and a higher level of consumer protection than unsecured loans” Karl Werner, MotoNovo Finance
Karl Werner, MotoNovo Finance divisional chief executive of motor, acknowledged that while dealers need to make sure everything they do is compliant, there is still pressure on sales and margins and still a threat from third-party finance.
He said: “We must keep our ‘foot to the floor’ if we are to expand dealer finance’s value.
“Central to the development of finance will be taking market share from direct, supermarket and high street lenders.
“Already, secure dealer finance can offer competitive pricing, affordability, flexibility, high acceptance rates and a higher level of consumer protection than unsecured loans.”
Werner said this message has to come across to prospective customers in the showroom.
He said: “We must also keep the offer easy to access; fresh and compelling, demonstrating through both the products and finance-buying experiences that customers can get the ‘good outcome’ mandated by FCA compliance.”
Andrew Smith, managing director at Consumer Credit Advisory Services (CCAS), said a simple way of checking whether a dealer’s showroom finance process passes Treating Customers Fairly (TCF) is the ‘friends and family test’.
CCAS has a director who sits on the FCA’s Skilled Persons panel, which means it understands the inner workings of the organisation, Smith said.
“One sentence that came up in these discussions, was: ‘Would you be happy if you or one of your family members had been through the sales process that your business presents, and have they got the product they wanted at a fair price?’. That, in a nutshell, was the panel’s definition of TCF.”
The finance houses agree that while most dealers have got to grips with what the FCA expects from them, the goal in the showroom now is to make sure that process is consistent.
Jo Jenner, Mann Island Finance managing director, said: “Every customer must be treated fairly and no party should be exposed to unacceptable risks, this has to be central to the finance offering.”
Jenner said an F&I mystery shop of 24 dealerships conducted by Which? in March found shortfalls in the point-of-sale finance experience, including a number of issues obtaining a written finance quotation, with some dealers providing an incomplete quote and others failing to provide any information at all.
“While many expected the role of the business manager to diminish, we have in fact seen the reverse happen over the past few years” James Broadhead, Close Brothers Motor Finance
Mann Island advises its dealer partners to conduct regular reviews of their showroom and online sales practices and procedures to ensure standards are maintained.
Jenner said: “Central to this review is making sure all information provided to customers about the dealership and the products available through it is ‘clear, fair and not misleading.’
“Dealers also have to ensure the information enables the customer to assess whether a particular product suits their needs and circumstances – and whether they can afford it.”
The provision of a complete and accurate written quotation should be seen as a “minimum requirement”, said Jenner, and all customer-facing staff should make sure this happens.
Staying compliant doesn’t have to mean customers are bored to tears during the sales process either, but it takes work.
Jenner said: “I firmly believe that the required standards can be built into a tailored and distinctive dealer approach that differentiates the business, elevating the customer’s buying experience and making the dealer’s finance proposition compliant, but memorable.”
It’s up to dealers to work with their wordings to keep things engaging. The finance houses can work with dealerships to help fine-tune the process.
The role of the business manager
Compliance has also placed a greater importance on the role of the business manager to be the centre of FCA knowledge. Does that mean the role is now essential for automotive retail?
Franks said: “I think deciding whether you have a business manager or not really comes down to what processes an individual dealer has adopted.
“Without a business manager, though, you’re looking at the sales team to each have that increased individual competence on the FCA’s regulations.”
James Broadhead, Close Brothers Motor Finance chief executive, believes the role of the business manager should not be overlooked.
He said larger dealerships in particular still need a business manager because the range of products available is much wider than in the past and they can provide knowledge and expertise that customers are unable to find elsewhere.
He said: “While many expected the role of the business manager to diminish, we have in fact seen the reverse happen over the past few years.
“Smaller dealerships may not always have the resources to employ a specific business manager, but it’s crucial that the skills and knowledge that a business manager provides are not lost.”
A balanced scorecard
As part of compliance monitoring, dealers are looking to use the suggested ‘balanced scorecard’ approach from the FCA. It means the way business managers or sales executives are incentivised is not just based on sales volumes, but will include other measures that determine how much bonus is awarded.
An example of the measures in a balanced scorecard approach may include; sales results or financial contribution; sales quality results; customer satisfaction; and other key performance indicators (such as cancellation rates, upheld complaints and the mix of products sold).
Broadhead said larger dealerships in particular are leading the move away from deal-by-deal incentivising and are instead rewarding a balanced performance over a month or quarter.
Franks believes the balanced scorecard approach is now starting to be adopted by dealers across the board.
He said: “Rather than just looking at one area to perhaps hit a sales target, dealers are looking at balancing out the deal across customer service, finance penetration or add-on sales.”
MotoNovo takes an incentivised approach to FCA compliance, making sure its sales process is balanced.
It launched its MotorV8 monitoring and reward programme built around supporting TCF in August 2015.
More than 3,000 of MotoNovo’s dealer partners are using the system, which takes customers through a digital survey after they buy. It encompasses the whole buying experience, not just the finance element.
Dealers can reward staff who score highly for compliance and customer service.
Werner said the data captured from customers can help to shape training and marketing programmes for the future. The MotoV8 programme also acts as a way for dealers to capture evidence of their sales process in the showroom in the event of an FCA audit.
Shaun Harris, Codeweavers sales director, said digital tools should not be seen as mutually exclusive from the point of sale.
He said: “We must recognise that with handheld devices, the range of online finance tools are equally as comfortable in the showroom where customers can use them to develop their own finance proposition as they walk around a dealership as they can online.”
Dealers can use data from finance tools to find out how many customers have printed or emailed themselves a finance quote, find out the number of leads generated that should be coming into the showroom, establish the most popular finance products based on traffic activity and trends on what stock is attracting the most attention.
Harris said: “Dealers can refine their finance offer and plan their stock mix. Perhaps, above all they know the scope of the opportunities that may have been missed and then take corrective action to drive consumer interest to action.”
While the rollout of tablet computers to aid the process is happening, Franks believes this approach hasn’t been adopted on a mass level yet: “I think there’s still some way to go with tablet technology in the showroom.
“I think one of the main barriers getting in the way of that is integration with the dealer management system. Depending on what DMS a dealer has, it might not be so easy to link in their finance offering with what they have installed at the dealership.”
Speed of approval
Broadhead said technology was also a big help in improving speed of sale and speed of approval for finance for customers.
He said: “Another significant development is the ability to pre-screen customers so that they can place the finance with the most appropriate partner. Dealers are able to qualify their customers, sometimes using a national credit score or soft search to identify the most appropriate product or finance provider for the customer.
“This ultimately allows dealers to assess the customer before proposal to their finance partner, which significantly improves the efficiency of the whole process.”
However, Broadhead said it is more important that the customer gets the right decision, than a wrong decision quickly.
Close Brothers uses a human underwriting team rather than an automated process, which Broadhead believes makes things more flexible for customers. Alphera uses a similar approach with its own underwriting specialists.
Broadhead said customers will often look to do the finance application groundwork online before visiting the dealership.
He said: “We are therefore seeing many more dealerships aiming to provide customers with the ability to receive a quote, an approval and the documentation all online, so that in essence, the transaction can be completed online before the visit to the dealership.”
Used PCP in the showroom
Used PCP finance is starting to gain traction in showrooms across the UK, moving from 34% to a 39% share for the 12 months to February 2016, according to the FLA.
Philip Nothard, consumer and retail specialist at Cap HPI, said: “With rising used volumes, sustained levels of consumer demand are vital to the stability of the market.
“The growth of PCP in the used sector is helping to support demand. The ‘iPhonification’ of motorists’ behaviour is a trend set to continue as motorists get more comfortable with a ‘cost to use’ over a ‘cost to drive’ model.”
MotoNovo said its sales increased by 35% and the majority of its business is dominated by the used vehicle finance market.
However, the unsecured loan market is also growing, up 9.7% in the past 12 months, according to the most recent Bank of England data.
Karl Werner, MotoNovo Finance divisional chief executive of motor, said: “The used vehicle market is particularly susceptible to the return of unsecured lending and if, as an industry, we do not embrace change, a return to the pre-recession era of what seemed like terminal decline for dealer finance is a risk that would impact almost all motor dealers.”
Werner argues that the scope for further growth in new car PCPs, which dominate new car finance, is inevitably limited as it is already at more than 80% penetration. He believes the next area for growth in showroom finance will be with used PCPs.
Werner said: “As dealers focus on the profit opportunity afforded within the used sector and improving supply in the new to two-year category, there is certainly growth potential within used car finance.”