Author: Robert Newbold (pictured), founder of consultancy Invicta Automotive
'Under the new FCA credit regulation, one of the key areas of concern for dealers, as well as operating a compliant model and ensuring that customers are treated fairly, is the ability to maintain, or improve, earnings from F&I.
This is understandable in a highly competitive retail segment, with extremely slim margins, where many dealers already rely on finance and insurance, as a critical income stream to delivering a viable business model.
Some industry commentators have talked about the need for dealers to switch their earnings to other areas of the business, such as vehicle margin, to compensate for a supposed inevitable reduction in finance income.
This is easier said than done in a marketplace where the internet and an abundance of fingertip information, is driving vehicle price pressure downward. If retailers could generate additional margins, in other departments, then they probably would have already done so.
Whilst the basics framework of credit regulation is reasonably simple, it is the interpretation of the guidance that can be more subjective.
One of the most common areas of debate for dealers is credit ‘pricing’.
Overall, the regulation is not, and should not be, about pricing specifically, but more about the regulator ensuring a satisfactory level of competition exists.
A culture of ‘treating customers fairly’, does not need to manifest itself in selling products for little margin. Once dealers are clear about this, they will also be clear that generating margins from finance and add-on services should be and still is an important part of a successful motor retailer business model.
‘Pricing’ has also featured, significantly, in finance house interpretations of the regulations.
Undoubtedly, the regulation has put significant demands on finance houses and has produced varying interpretations from different providers, many of whom have restructured their pricing.
Indeed, there are examples of low retail price structures from some manufacturer finance houses, in particular, where retailers' opportunity to sustain margin from finance sales will come under pressure.
Claims from lenders that an increase in finance penetration will compensate the reduction in dealer earnings per case are sceptical, given the current high penetration levels.
While finance houses should obviously have a vested interest in good customer outcomes, they should also recognise that dealers are their primary business-to-business partners.
Those finance houses that work closely with the retail network on their proposed trading changes, will find the transition easier for both dealer and lender.
The good news overall is that, providing dealers proactively embrace the regulation and recognise the benefits it can provide, there is an opportunity.
For dealers who invest in the right people and specialists, implement clearly defined sales processes and have a culture of monitoring and managing the sales of F&I the outlook is bright.
Moreover, good operators, are recognising that properly embracing the regulations, being proactive, in terms of customer financial qualification and resource to provide specialist F&I advice and compliance, are all key.
Resilient operators will revisit and refine their approach to finance sales.
Louise Wallis, head of business development at the National Franchised Dealer Association, agrees with this makes the points that "Dealers need to recognise the positive aspects of the new consumer credit regulation and embrace them fully. Robust showroom processes, well trained staff and strong dealership leadership, will all improve the customer showroom experience. This in turn will drive both car and F&I sales."
Below are the 10 most important factors for a successful F&I business model:
1. Invest in, or maintain the role of business manager: The ever increasing specialist advice needed, demands and risks of compliance, potential positive customer experience and income opportunity, mean that this function is still a critical consideration
2. Recruitment: Diligent and detailed recruitment to obtain the right business manager(s), who will drive performance, coach sales executives, oversee sales process, assist in closing deals and monitor and manage compliance and risk
3. Robust sales process: A clear, customer friendly, defined and managed process, will be embraced by sales executives and management, assist high CSI scores, help dealers earnings and profitability, close more deals and generate repeat business
4. Implement an FCA compliance framework: Implementing, evidencing, documenting, monitoring, auditing and reporting, with a level of internal independence and balance
5. Performance management: Reviewing and understanding areas of opportunity, sharing best practice and achievement and implementing actions, to drive and improve performance
6. Senior management commitment: Do all levels of management ‘buy in’ to the importance of F&I as a compliant, pro-customer environment and act on it?
7. Dealership management: The dynamic between general manager and sales department management, in understanding functions, layout, responsibilities, representation and common purpose
8. Training and coaching: Does your Business Manager properly understand the finance market, competition, retail and business user customers, competition and compliance? How much time is spent ensuring that other dealership advisors are equipped with the necessary knowledge and skills?
9. Product portfolio and pricing: A balanced portfolio of competitively priced, customer centric finance and relevant insurance products.
10. Pay plans: A balanced score card for business manager, sales manager and sales executives, including a balancing element, focussing on good customer outcomes.
> Robert Newbold, has previously been F&I director for top 40 AM100 dealer groups Marshall Motor Group and Vindis Group, as well as holding senior positions in Volkswagen Financial Services, including head of Seat and Skoda Finance and in addition, has had spells at PSA Finance and Lombard North Central.
He is the founder of newly formed consultancy Invicta Automotive, specialising in assisting dealers in compliance and optimising F&I income streams.