Chief executive officer Mark Standish wants increased transparency in the sector to ensure commissions are proportionate to loans and the time they run.
“Today’s F&I business model is simply not sustainable,” he says. “We all have to change to ensure it reflects the changing operating environment, and to grow sales.”
The fall in point-of-sale finance is one of the reasons Standish foresees change. Regulatory and competitive pressures have placed serious pressure on the returns achieved by finance providers, and a rise in default is another factor.
Carlyle Finance is part of Wesbank, South Africa’s largest provider of motor finance, which has already adopted shorter commission payment periods.
Though no decision has been taken in the UK, Standish believes motor finance commission over a maximum of two years will soon become the standard model.
Average consumer loan periods for cars have fallen over the past few years, probably because consumers are consolidating their finances.
Standish’s likely move would remove the need for ‘debit backs’ – commission paid to dealers on measures including the amount borrowed and the length of the agreement. This is normally capped at 48 months, and the commission excludes volume bonuses and any stocking benefits.
Standish sees the only alternative to the introduction of a two-year commission period as ‘pay as you earn’, with commission paid monthly for the length of the agreement.
Carlyle has not yet discussed its proposal with dealers, and knows it is not likely to be popular, but other companies in the sector are believed to want to limit the time they pay dealer commission on loans.
If an agreement is settled early, motor finance specialists have traditionally ‘debited back’ part of dealers’ commission to reflect the shortfall in their anticipated earnings.
This has been unpopular with dealers, and in recent years competitive pressure has gradually eroded the system, with no ‘debit back’ after three months, except for fraud or bad debt.
Finance companies are losing out when customers settle early. Changes in early-settlement legislation two years ago mean they can no longer charge penalties.
Motor finance commission is based on finance companies’ anticipated interest earnings, but the figure is seldom achieved. It may be halved, yet dealers are still paid as if the agreement had run for the full period.