Almost a third (32%) of motor retailers are unaware of the looming January 28, 2021 ban on all discretionary commission (DiC) models in motor finance.
According to new research by Close Brothers Motor Finance, although 69% have heard of the new rules, only 33% of those that are aware have actually read the FCA paper explaining them.
The FCA policy statement paper, published in October 2019, set out ways to keep the industry fair and safe and improve outcomes for customers.
Following industry consultation, new rules include clarifying commission disclosure rules to increase transparency for customers, and banning pricing models linked to commission.
The FCA has deliberately not specified which commission models the industry should use, leaving that up to lenders to decide instead.
However, it has suggested moving to risk based pricing, provided the broker is not incentivised to set or adjust the rate charged.
It could also include banded-fixed rate models. Commission could also vary depending on other factors, such as by product or lender.
Dealers need to understand the rules as soon as possible
Seán Kemple, Close Brothers Motor Finance managing director, said: “Dealers need to understand the rules and be well prepared to make changes where needed, as soon as possible.
“It’s been a tough year for dealers with the closure of showrooms during the national, and now regional, lockdowns.
“Combined with economic uncertainty and Brexit, this may feel like an additional challenge at what is already a difficult time.
“But, we’re here to support our dealers and help them understand what the changes mean for their business and customers.”
Close Brothers has put together several initiatives to help dealers understand and adapt to the new rules.
For dealerships across the country, and which remain open, they can benefit from face to face support and training with their local account manager.
Dealers who face Covid-19 lockdown measures will be supported when their showrooms are back open, while also receiving virtual guidance where possible.
MotoNovo Finance’s chief risk officer Stephan Bothma is urging dealers to prioritise their approach to the forthcoming changes and make a positive decision.
He said: “As a risk professional, I recognise the risks of change, but above this, I recognise the risk of not embracing change positively.
“The dealer model is not immune to the current High Street issues.
“If we don’t take care of our customers, someone else will. Dealers need to invest in their relevance to today’s car buyers.
“Perceptions of used car dealer finance need to change. It is worth noting that finance volumes from over 2,000 dealers embracing MotoRate have grown over 70% new business year on year.”
Change is crucial to the sector’s future
Bothma said he believes a risk-based pricing model delivers a fair interest rate, appropriate to an finance applicant's circumstances.
Risk-based pricing is a method that lenders can use to determine interest rates for car finance based on the applicant's creditworthiness and risk.
If you have a good credit rating you get a better percentage APR. If you have a poor credit rating, the APR percentage goes up.
Conversley, Bothma described fixed-rate finance as a "blunt one-size-fits all" pricing model.
He said: "Fixed-rate does not work for the most creditworthy and can impact the broader loan book portfolio quality negatively, which, is bad for the reputation of dealer finance.
"It creates the self-fulfilling prophecy highlighted by sites like MoneySavingExpert; that dealer finance rates are often higher than standard car loans.
"As a result, all too often, customers seek their finance elsewhere, especially those with a better credit profile. It feels like an own-goal.
“The prize of positive change in finance is evident already; it is helping to turn the tide in the way people finance their used cars and helping to make the dealer model relevant and valued. Some may see the move as brave, I see it as crucial to the sector’s future.”