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OFT casts doubt on FSA

The Office of Fair Trading sent shockwaves throughout the automotive industry when it suggested late last year that the new FSA regulations, which came into force on January 14, might be anti-competitive.

The Office of Fair Trading (OFT) has already contacted the FSA about the new regulations which it says could breach European antitrust law by restricting the ability of a dealer to sell multiple marques. It is expected to decide soon whether enough car dealers are hit by the rules to pose a serious competition threat.

The FSA regulations were devised to protect consumers from being mis-sold insurance and insurance-related products. Since it was announced that the motor retail industry would also be the subject of the new rules they have been met with a mixed response by dealers.

The bigger groups took action to put in place processes in preparation for general insurance (GI) day, but many of the smaller ones have adopted a ‘head in the sand’ approach.

The OFT is particularly concerned about one of the two main options to meet the new rules: dealers becoming appointed representatives (AR) of manufacturers, rather than being regulated themselves directly.

The FSA rules say the contract (between manufacturer and dealer) must reserve the right to impose exclusivity at a later date. Consequently, no rival manufacturer will want to put its cars in the same showroom, something the block exemption regulation changes were designed to facilitate.

“We have raised the matter with the FSA. If we find there is a restriction on competition it is a question of whether we consider it significant. If we do we can go back to the FSA and ask them to look at their regulations and revise them,” says John Holmes, a principal officer at the OFT.

Even if two manufacturers did appoint the same representative, the competitive brands would have to agree how to handle complaints, which is seen as very unlikely.

The FSA gives a principal (the carmaker) the right, but not the obligation, to prohibit its’ appointed representative (the dealer) from representing other principals.

If this restriction is not imposed then the agreement must contain either a provision allowing such prohibition to be imposed later, or one allowing the principal to impose restrictions as to which other principals the AR can represent plus an obligation to be notified if the AR seeks to be appointed as an AR for any other principal.

“There are regulations covering ARs acting for multiple principals and if you think about a high street broker acting for a number of insurance or investment companies then the regulations are able to cope with this type of situation,” says Andrew Armitage, head of the automotive sector at commercial law firm Howes Percival.

“Because VMs are coming to the issue for the first time they may not have thought about how they may have to co-operate with the other VMs when supervising dealers acting for more than one principal. VMs tend to concentrate on their own business and processes and this issue could well have taken some by surprise.”

The regulations are all about protecting customers from the risk of mis-selling and because the principal has a high degree of responsibility for the actions of its ARs, Armitage believes they must have rights to control those activities.

“Clearly this is legitimate. Motor dealers have the right to take on other franchises and I see conflict if a VM imposed a blanket restriction on the AR dealer acting for other VM principals without being able to explain its reasons. Because the regulations can cope with multiple principals it seems hard to justify a principal having the power to impose such a prohibition,” says Armitage.

“The other conflict would be if the right to impose these restrictions, even if not imposed initially, acted as a deterrent to dealers taking on other franchises. A dealer is unlikely to invest in setting up an additional franchise is there is a real risk of the first principal stopping the dealer from dealing in insurance for the additional franchise.”

Experts in the finance and insurance industry say they would be surprised if there was a serious issue with the FSA rules as most dealers are opting to become directly authorised.

“Dealers have been encouraged to seek direct authorisation in their own right and the majority of the market is consistent with that.

Most of the manufacturers have also recommended that their retail networks become authorised,” says Stephanie Murdoch, managing director of specialist insurance and financial services company Auto Network UK. “The FSA is going through a learning curve and it’s the responsibility of the industry to work to develop regulations for the long term.”

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