Executives in the UK retail motor and finance sectors are concerned about inconsistencies in processes and procedures that will govern the implementation of new EU consumer credit regulations.
By February 1 all providing point-of-sale loans must be compliant with the Consumer Credit Directive, now widely referred to as CCD. It will be enforced in 26 other European countries as well as the UK.
No one is likely to oppose its objective: all customers who commit to repayments on a loan to buy a car or anything else should understand completely their responsibility to repay it.
The basic document briefing consumers is pan-European – the problem is that lenders are using different styles to advise people because they are part of their individual sales processes.
Some lenders and dealers believe little will change – that it’s just a question of adjusting to a new regulation designed to protect consumers a little better.
Stephanie Murdoch, managing director of training and compliance provider Alliance Consulting, is among those seeing problems ahead.
“Preparation for CCD is inconsistent,” she said. “The onus is on suppliers to make sure that dealers are compliant by February, but they are being inward-facing and focusing mainly on their own processes.
“Frighteningly, some lenders have still not prepared their dealers for CCD and I am concerned that they will not be ready in time.”
The sector won a delay in CCD implementation from June to the beginning of February and the EU has already rejected any further postponement.
An underlying problem is that dealers have been made weary by the form-filling bureaucracy introduced by the Financial Services Authority.
The FSA was asked by the Labour Government to regulate the way finance and insurance products were sold by motor retailers.
For the implementation of CCD the EU’s chosen UK partner is the Office of Fair Trading.
But by the end of 2011 the OFT is due to be merged with the Competition Commission. This could result in changes to the way CCD is enforced within a year of its introduction.
Both motor finance lenders and their retail partners find it annoying that the UK tends to stick rather more rigidly to the letter of EU law than some other member states not that far from its shores.
Over the past few months banks and other lenders have been briefing their dealer partners on what they need to do by the time showroom doors open on February 1.
The lenders know retailers will do their best to follow the guidelines, but privately some bank executives have misgivings about the combination of EU rules and OFT jurisdiction.
One bank executive said: “In March the Office of Fair Trading introduced its own package of rules to protect con-sumers. It’s another set of tentacles called Irresponsible Lending Guidelines (ILG) – only the OFT could come up with a title like that. When you put CCD and ILG together it’s more over-engineering of credit rules and regulations.
“You can’t write in black and white what the outcome will be. It will be a case of trial and error and everyone should focus on the spirit of the regulations rather than the details.”
Another lender executive said: “Dealers are getting lots of guidance about CCD and ILG. They will be well advised to remember these three steps: make sure staff have proper training on showroom sales processes, apply the rules with care and, most importantly, keep appropriate records. Without evidence dealers will be in a difficult position if they are challenged in court over CCD.”
Which? has welcomed ILG but, with some misgivings.
Martyn Saville, its credit and debt expert, said: “The introduction of ILG was a welcome move by the OFT, but it remains to be seen whether the rules will translate into a real-life crack-down on irresponsible lenders.
“It’s to be hoped that they will result in better assessment of people’s affordability to repay loans and credit cards – and better treatment of those who find themselves in financial difficulty.”
The OFT’s guidelines are broadly in line with the objectives of the CCD regulation. For dealers it means not misleading customers or being oppressive when advertising, selling or seeking to enforce a credit agreement.
Showroom employees have to provide enough information for borrowers to make an informed decision on credit and assess if they can afford to – and will – make repayments. The dealership needs to monitor the repayment record of borrowers, offer advice if they appear to be experiencing difficulty and treat them fairly.
The EU Consumer Credit Directive covers almost all types of loans from £160 to £60,260 and has clauses intended to protect customers, including their right of withdrawal without explanation within 14 days.
The cooling-off period is included because some consumers have complained about being pressured into signing credit agreements. But a customer who changes their mind about the credit agreement cannot return the car, says the EU. They must repay the credit plus any interest and then find another way to fund their car purchase.
Dealers must store details of customers’ pre-contractual information (understanding what they are doing). The main change here is that the information should follow the lay- out of a SECCI (standard European consumer credit information form). The idea is to help customers compare information from different lenders.
There will be an onus on retailers to judge a customer’s ability to make early or partial repayments (completing repayments ahead of schedule or facing problems with them). Credit customers will be allowed to make lump sum payments during the loan period to reduce the balance owed, but only after giving notice to the lender. The customer can choose to reduce the term of the agreement or the monthly repayment, or both.
Deciding if a customer can afford a loan and making an assessment of their creditworthiness is a potentially tricky area for dealers. The member of staff negotiating the loan must make customers aware of the structure and timing of repayments and ask whether or not they can afford them.
A further check is to advise a customer to consider any potential future changes in their circumstances that could affect their ability to keep up monthly repayments.
Because implementing CCD correctly is so important many finance companies and dealers are already operating with the new rules in place.
The RMI is providing information and support about CCD for dealers.
The trade body sees problems ahead around what happens when those gaining credit change their minds within a fortnight.
Louise Wallis, RMI head of business development, said: “If, within 14 days, a customer cancels their finance contract, this will not cancel the whole deal. The customer must pay for the car by another means.
“There is a potential risk for dealers because some customers may not be able to pay for the car any other way and attempt to cancel the deal.”
Wallis said there were always problems with such major legislative changes. Already there had been a few minor issues, particularly around finance houses not having a consistent approach to CCD.
“This has hampered dealers working with more than one finance provider,” she said.
Dealers are complaining to the RMI that CCD is yet another change to finance regulation not long after the most recent Consumer Credit Act.
“There are concerns that the sheer quantity of information a dealer must give to a customer may be confusing rather than informative,” said Wallis.
Leading finance providers are using a range of training methods to assist dealer staff to understand their new responsibilities under CCD.
Black Horse, the UK’s biggest point-of-sale motor finance provider, implemented essential changes within its processes in late November. Its field sales team have been given specialised training and a similar exercise is underway for its dealers.
Managing director Chris Sutton said Black Horse’s strategy had been designed to make dealers’ lives easier and help them understand what CCD will mean for them and their customers.
“Our aim is to enable them to overcome some of the complexities of the legislation by helping them to embed it within their own sales processes,” he said.
Graham Prestedge, commercial director, Santander Consumer UK, said: “We have sent regular updates to our sales force and informed our dealers of the key changes.
“Santander will go live with new CCD compliant agreements from January 12. We are now in the process of rolling out detailed training to dealers to ensure they fully understand CCD and the changes this legislation brings.”
Santander’s dealers are receiving a detailed presentation pack and have a CCD mailbox for any queries. A desktop reminder of the key changes will reach all dealers this month.
To ensure compliance, regulated agreement packs have been updated to include an ‘explanations document’ – dealers will verbally give this to customers during the sales process and hand them a copy of the document.
Prestedge said: “We believe that in the long-term CCD, if understood and built into the sales process, will have little impact on selling F&I. However, in the short term dealers need to understand its requirements.”
Spencer Halil, UK director of Alphera, BMW Financial Services’ multi-make brand, said that after CCD material was distributed dealer partners were asked for their feedback.
“We talked about the implications as we saw them, outlined how we thought we should change our own processes, and got their reactions.
“That dialogue helped us to shape both our processes and the way we’ve gone about communicating with our partners.”
Halil said CCD has the potential to make it easier to sell automotive fin-ance and insurance because it should give customers more confidence that they are buying the best product.
“Compliance ought to be seen as a professional stamp of achievement,” he said. “The frustrating thing is that there is no formal template from the official bodies to tell us what makes a process compliant.”
Carl Virgo, head of consumer finance at Southern Finance, a division of Raphaels Bank, said: “It has been our goal to present all CCD processes and procedures in a simple clear and concise checklist format.
“Many dealers are ambivalent about CCD. They know it means more work in the sales process, but should be no more than procedural clarification of some straightforward aspects of a customer’s circumstances.”
Lenders failure to advise with one voice could lead to confusion
A number of specialist companies expect confusion because lenders are presenting information in different ways for dealers to give to customers to conform to CCD.
Nancy Rignall, deputy managing director of insurance provider Mapfre Abraxas, has concerns about inconsistencies around CCD among lenders. The regulation does not directly affect insurance products, but Mapfre does best selling them through dealer groups good at point-of-sale loans.
“We could see that a dealer selling loans from three finance companies might need to train staff in the use of three sales processes,” said Rignall. “We developed software to overcome this, tested it through two dealer groups and are now rolling it through our retail network so we are ready for February 1.”
Rignall said CCD could have been implemented more easily if the overall guidelines had been made clearer from the beginning: “It’s been a case of ‘have a go and find out if you’re getting it right’.”
Fimtrac, a business intelligence company within the RTS group, also said lenders confused dealers by developing their own implementation strategy, methods and timescales for their own processes.
“Many dealers have expressed a desire for a consistent industry-wide approach,” said the company. “They are apprehensive and worried that the new rules will lead to heavy-handed administration and potentially a reluctance to offer finance – very similar to the FSA implementation and the affect on some insurance product sales.”
Keith Dowler, a director of finance broker Mann Island, said: “The Finance & Leasing Association didn’t bring its members together to ensure uniformity and we are working with lenders to try to resolve this.
“One reason for confusion is that lenders are adopting CCD at different times. Some have done so, others may leave it until February 1.”
An FLA spokesman said: “We have run explanatory courses for members, but lenders are using the provisions of CCD as part of their sales process. The FLA would run a course for members if there was a demand to achieve uniformity.”
Mann Island expects some car buyers to cancel their finance agreement within the 14-day cooling off period and then shop around for a better deal.
“Dealers often offer loans based on monthly repayments that produce the best commission, but are not necessarily the best for their customers,” said Dowler. “Dealers rely on customer apathy, knowing they don’t look around for finance in the way they do research on various cars they might buy.”
CCD lays down ‘what dealers should do’
Redline Specialist Cars at Knaresborough, North Yorkshire, believes the arrival of the Consumer Credit Directive could help it to improve its current 30% repeat business.
The company sells prestige used cars, including BMW, Jaguar, Porsche and Lamborghini. More than one in three customers use finance.
John Graham, Redline sales director, said: “CCD specifies what dealers should be doing anyway. We have always believed in treating people fairly and found that it leads to more business.
“Dealers are becoming much more professional and should no longer think about just getting someone to commit to a loan. It’s right dealers should make sure people understand what they are signing when receiving an advance to buy a car.”
Redline Specialist Cars has a sales team of seven, but only Graham and one other member of staff take customers through the final procedures before they sign for a loan.
“Our customers don’t know anything about the Consumer Credit Directive,” he said. “But when we tell them what it is and how it helps them, they come to see they are being looked after well by us.
“If you do things properly there is less chance of problems later. I am not concerned about the 14-day cooling off period because I do not expect many customers to use it.
“Dealers need to be smart and to realise the cooling off clause won’t create difficulties if they look after customers.”
Graham says Carlyle Finance has provided all the support Redline needs for CCD. “We have someone from Carlyle in here once a week to provide support and I have been to the company’s offices,” he said. “We get on well with Carlyle, which helps when dealing with something like CCD.”
Stuart Inglis, business manager at Parkway VW in Derby, is dealing with contrasting finance companies over CCD.
Most loans are provided by Volkswagen Financial Services.“The format is a bit over the top and it could be difficult for customers to understand,” he said.
Inglis, who also has an overseer’s business manager role at three other Parkway VW sites, said Carlyle’s approach was more user-friendly.
“I think Volkswagen believes it knows what sort of customers will use it, whereas Carlyle’s approach is that any buyer should understand it.”