Close Brothers Motor Finance is looking to grow its business this year with the help of used car PCPs in the independent dealer market.
Paul Kaye, Close Brothers Motor Finance sales and marketing director, told AM that within its network of 7,500 dealer customers the penetration rate with used PCPs is at 15% and he thinks it can increase to 25%.
While used PCP penetration is around 40% for the nearly new market, Kaye admits the business won’t hit that simply due to the spread of dealers it works with offering older cars.
The 10% growth will come from dealers offering cars up to five years old and this is where Kaye thinks is the sweet spot for Close Brothers.
He said: “We do think if you look at the new car space, somewhere between 70% and 80% of new cars are sold on PCP and that’s starting to filter down into the zero to one year old car space now. In the two to five year old market, it means used dealers are going to have to compete.
“We’re looking to increase our guaranteed future values and that will be done in a controlled way. It will be done with certain marques and certain dealers. We think that will help get the higher penetration.”
Kaye said Close Brothers needs to make absolutely sure that as the business is looking for this growth that it works with dealers to make sure they recognise what type of customer is right for a used PCP.
He said: “The used PCP is a good product for us, for dealers and the customers but it doesn’t mean it’s the only product out there. So we need to make sure that as we’re going for this, dealers are educated in the right way to know whether PCP or hire purchase is the right thing for the customer.”
Brexit and uncertainty
As the fallout continues in the wake of the Brexit result, dealers have been feeling nervous about the future and Close Brothers has been stepping in to reassure.
Close Brothers’ dealer customers range from single site used car operators to the major car supermarkets.
Kaye said: “Dealers across the board are a little bit concerned about what’s going on because of Brexit.
“They’ve been asking us what we’re going to do. We’ve been reassuring them that we’re here through thick or thin for the long term.
“The way our model works, we can continue to lend through all economic cycles. We grew quite a bit through the last downturn. With the current turmoil with Brexit, we feel prepared to deal with that. We’ve proved our track record during the recession. It doesn’t phase us.”
Kaye has noticed competitors reverting back to the same tactics that were happening just before the credit crunch by “pushing their credit parameters a little further than they should” and pricing that is “pushing the boundaries”.
He said: “It will be interesting to see how those companies react to Brexit now. They have their business models, we have ours.”
“It’s too early to say if there will be exits from the market due to the fall in consumer confidence.”
FCA regulation and dealer remuneration
While growth is on the cards from used car PCP and its referral service this year, Close Brothers won’t grow if its dealers are struggling to get to grips with the Financial Conduct Authority’s (FCA) regulation.
The big project Close Brothers regulation team is working on at the moment is on the way its prices and remunerates dealers.
This is in response to the FCA’s thematic review of staff remuneration and incentives that was announced in August last year.
The FCA identified that in some cases there was a possible conflict of interest where managers were paid a bonus based on the sales made by staff they supervised.
The FCA has taken a desk-based review of firms’ incentive policies, remuneration arrangements and controls and from early this year it has been conducting on-site visits and more detailed testing on a selection of firms. The results are expected this summer.
Kaye said: “There are still dealers out there that are still unsure of what’s next. Certainly how the focus on pricing and remuneration will affect them. The regulator has made it clear things like volume bonuses might have to go.
“Dealers are nervous about that, but we’re making it clear that if volume bonuses go, we’re not going to reduce the amount of commission we pay dealers. We’ll pay it in a way that’s compliant but also in a way that benefits dealers, the customer and us.”
Kaye said he couldn’t share exact details of how Close Brothers is going to move forward with its approach to the FCA’s thematic review, but said it would share details before the end of this year.
He said: “You could argue us spending time on FCA regulation, it takes my guys away from driving business up, but actually it’s very important that this is a partnership. We’re working on how we can give dealers industry stats, we try and make sure our account managers are aware of what’s going on in the industry. A specific budget for helping dealers isn’t set out, we just do what’s needed to be done to make sure we are compliant with whatever the regulation is at the time with a dedicated team that are looking at it all the time.”
Kaye said the industry would wait and see whether Andrew Bailey, the man brought in to head up the FCA in January this year, would change the approach of the regulator.
But on the topic of how the industry is coping with the increased scrutiny from the FCA he said: “The automotive finance market has been operating for a long time and actually on the whole there’s not been too much in the way of massive customer detriment.
“It’s regulated itself reasonably well. That’s not to say it can’t be improved and it can’t get better, but I don’t think it’s fundamentally broken. There is a danger of over regulating a market which leads to unintended consequences.
“I think it’s right there should be good customer outcomes, there needs to be dialogue. I think the Finance and Leasing Association (FLA) does a good job there in representing the industry. As long as that dialogue happens I think there will be the right outcomes on all sides.”
Referral service and accept rate
Close Brothers has seen its accept rate increase from 65% to 75% in the last 12 months and it’s down to its new referral service that launched a year ago.
If a customer is not accepted on Close Brothers’ terms, rather than dealers pushing the deal to other finance partners or brokers, Close pushes it to its own partner Jigsaw that will find a home for the customer with a panel of lenders. Customers have to opt in to use the service after it is explained to them, but the benefit for them and the dealer is that it can cut down the time for waiting for a deal.
Around 65% of Close Brothers’ dealers are using the referral service. The referral service started with cars, but has now been extended to light commercial vehicles and motorbikes.
Kaye said: “The referral service came out of a desire for customers to drive away in the car they want to buy and for dealers to sell the car the customer wants to buy.
“We felt there was a percentage of customers that we weren’t accepting. Most dealers will probably work with one or two prime lenders and then a broker they might use as well. They’ll prop it to the number one and then somewhere else and somewhere else and there’s a delay.
“Using our referral service it comes to us and it will get sorted all in one go.”
Kaye believes a key reason behind Close Brothers’ longevity in the motor market (it entered in 1988) is its 13 physical branch locations across the UK.
There are no plans to increase the amount of locations due to already achieving a good geographical spread.
He said: “It works for our dealers who like having that local presence and all our underwriters are at that local branch.”
The underwriters based at the branch work with the company’s 70 account managers that are on the road visiting dealers.
Close Brothers does quarterly surveys of its dealers to track satisfaction and the latest shows 97% rated the branch service as good or very good.
Kaye said: “While we’re getting those sort of satisfaction scores, I think it sets us apart from the competition. We’re the only lender that has a branch network like that and has localised underwriting. Our dealers can pick the phone up and speak to people they have a relationship with.
“Because we look at deals manually we can shape a deal that works for both the dealer and the customer and us. Our underwriters are skilled at doing that. It helps us write more deals and keep our bad debt very low.”
Close Brothers’ bad debt ratio is at 0.6% and Kaye says it stays close to that level through economic cycles. The industry average is around 1.5%.