Richard Barnwell, financial services advisory partner at BDO, outlines what the FCA's new Consumer Duty will mean to UK motor retailers and repairers.
The Consumer Duty is aimed at creating higher standards for consumers and improving competition in the retail financial services market. Within the motor retail sector, this will predominantly impact dealerships providing financing and insurance products.
The Consumer Duty comprises three key elements: A new Consumer Principle; cross-cutting rules requiring retailers to act in good faith (e.g. providing truthful information), avoid foreseeable harm (e.g. steps taken in areas such as affordability checks) and help consumers achieve their financial objectives (e.g. supporting customers receive value) and four consumer outcomes, those being:
- Consumer Understanding
- Price and Value
- Product and Services
- Consumer Support
How will this affect the motor retail sector?
Most dealerships distribute financial products either to facilitate or complement the vehicle sale. As such they must also ensure that they are meeting the higher standards and expectations the FCA have laid out, by:
- Ensuring they have a Consumer Duty implementation plan outlining the steps that they will take to meet the requirements. This should contain objectives, approach and key workstreams and should be approved by each retailer’s board (or equivalent management body) by the end of October 2022.
Ensuring they receive information from manufacturers on financial products they distribute by the end of April 2023, to enable them to meet their obligations (eg in relation to the price and value, and products and service outcomes).
- Ensuring they have implemented, and can evidence, processes to meet the Duty for all products and services currently offered by July 2023 (and July 2024 for closed book products).
Examples of outcomes and expectations
The below provides a few examples of areas for consideration against the four consumer outcomes.
During the sales process, the FCA consider that retailers have an advantage over consumers as they can choose where, when and how to display information regarding their products without customers knowing all the details. Retailers need to evidence that they are transparent in their offerings, providing clear and concise information at the right time of the sales journey for customers to make informed decisions. For example, for insurance sales, customers must be able to understand the insurance being offered in terms of areas such as coverage, claims process and exclusions.
In most cases, insurance and financing is provided by a third party, usually under an agency arrangement and retailers will need to make sure that they work with the financing/insurance companies to understand the products being sold.
Price and value
The FCA have historically raised concerns that commission models are not always consistent with delivering fair value, highlighting retailers should not be remunerated in a way that prevents them from acting in the interests of customers, potentially causing customers to pay significantly more for their motor finance or insurance. In addition, with higher inflation and a cost-of-living crisis, the FCA has emphasised that lending must be affordable. In particular, motor finance providers must ensure that there are processes in place to check potential buyers can afford the finance being offered.
The insurance sector has already seen significant regulatory change in this area with the introduction of the FCA’s pricing practices, value measures and product governance requirements. Retailers that have aligned their own practices to relevant expectations will be more progressed against the requirements of the Duty.
Products and Services
Retailers need to consider any particular needs or vulnerabilities of customers in their target market and evidence that they have processes which can be tailored to specific consumers. This could include a questionnaire prior to the car purchase to understand the needs of the customer.
Retailers providing financing/insurance must provide frictionless processes in dealing with customers. For example, it should be as easy to complain, switch or cancel products or services as it was to buy them. Retailers should be looking at feedback from customers and staff as well as working with lending and insurance firms to see how service can be improved and ensure they are working in the best interests of vulnerable customers.
MI and Consumer Duty
Management Information (MI) provides insight to help better understand organisational performance. In the context of the Consumer Duty, this means tracking data in order to determine how the retailer is performing in delivering good consumer outcomes. Some examples of MI which should be tracked for the motor retail sector include complaints, customer feedback and outcomes of file reviews. Consumer Duty will require retailers to also demonstrate that they have the right governance in place to deal with any MI that shows a risk of bad customer outcomes.
BDO is currently supporting retailers on their Consumer Duty journey in a number of areas such as awareness and training, gap analysis reviews, Governance and MI and implementation plans.