Alphera Financial Services has confirmed it will be offering one rate of finance and one rate of commission from January 1 next year in response to the Financial Conduct Authority’s ban on all discretionary commission (DiC) models.
The FCA’s ban will come into place from January 28, 2021 and finance houses are introducing alternative models like flat fee or risk based pricing.
Christopher Woolard, the FCA’s interim chief executive, said back in July that by banning this type of commission, where brokers are rewarded for charging consumers higher rates, “we will increase competition and protect consumers”.
Changes to the FCA regulations were a central feature of AM Magazine recent Finance theme, published earlier this month.
The FCA estimates taking this action will save consumers around £165 million.
Spencer Halil gave one of his last interviews as managing director of Alphera before the announcement he would be leaving to join leasing and mobility specialist Alphabet as chief commercial officer in February next year.
Halil told AM: “We have the general view that compliance will make what we do better.
“We’ve taken the FCA’s policy statement on board and there are opportunities to improve and simplify the finance process.”
Halil said Alphera has been working with retailers and brokers on their sales strategy in order to determine what fixed commission rate they will be working with.
He said: “That won’t be allowing discretion as customers will be getting one rate and dealers will also be getting one rate, but it will allow us to work with retailers and their sales strategy.”
Halil said offering one rate and one commission is actually introducing more simplicity.
Alphera has already started implementation of the new model and is confident all retailers will be ready by January 1.
The business did also consider a rate for risk model, where the finance rate is calculated based on the customer’s creditworthiness, but is waiting to introduce this model later in 2021.
Halil said: “It does appear the FCA looks at the rate for risk model favourably, but it needs to be offered in the correct way.
“We believe the majority of our customers will be more suited to the one rate model. We have also never offered a rate for risk model in the past and our systems aren’t currently set up to support it.
“However, it’s something we are actively working on. We want to take the time to make sure we get it right, so we’ll be looking to offer it in the second half of 2021.”
Average earnings should stay the same
Halil said the average earnings from finance should stay the same for those using the new one rate model.
He said there is also the opportunity to increase finance penetration rates because customers will feel more confident with the process of having a single rate.
So while the average per unit might stay the same, Alphera is expecting the number of sales to go up.
Halil said: “Some dealers may have a different view because it means there is no scope to discount and that could lead them to losing a deal.
“We’re less concerned about that. We think there are areas to negotiate around the part exchange or the price of the vehicle for negotiating power, rather than the rate of finance.”
The responsibility for commission disclosure sits with the retailer, but Alphera acknowledges that it also has a responsibility to help support retailers with their processes.
From January 1 all Alphera’s policy statements and documentation will increase the prominence of commission disclosure.
The company is also advising that all retailers bring attention to the fact commission is being made on the finance.
Halili said: “They don’t necessarily need to disclose the exact amount, but then that gives an opportunity to those customers that would like to know the exact figure to ask.
“I don’t think you can objectively decide whether knowing the commission would affect someone’s decision to buy or not, so that’s why our advice is to make it clear that commission is being earned at the point of sale.
“It’s also important that you let customer know that before you get too far forward in the sale and evidence that a customer was made aware before they purchased, so they need to know before they make their buying decision.”
Alphera will be auditing their dealers’ processes between January and September. This will help to catch any teething problems.
This will be before the FCA starts its own auditing processes from September next year.
Alphera will also be using mystery shops for the first time.
Halil said: “I know some dealers are opposed to mystery shops but I think this is a real opportunity to give the finance process a health check.
“While we’ve done all we can to prepare, I think it’s likely there will be improvements to be made next year and going forward. We need to access how this all works in a live environment.
“Like everything we have found when it comes to compliance with the FCA they want to see you acting in the best interest of customers and in the spirit of the regulations.
“As long as they can see you doing that and there is the willingness to improve and address processes there will be the opportunity to set any issues right.
“We will adapt our approach after launch as things evolve.
“This is a real opportunity for the industry to show that we do the best for our customers and we can be trusted. That doesn’t mean we can’t make money in the process.”