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Motor finance providers were one of many sectors on the receiving end of the FCA’s Consumer Duty letters to CEOs this month. And although there has been no shortage of guidance from the regulator on the Duty it is useful to reflect on the specific implications for the motor finance industry.
The Consumer Duty sets a higher expectation for the standard of care that firms give their customers – and how they evidence it – at all stages of the journey, whether disclosure and product selection at the point of sale, post-sale support, and arrears handling.
Here, we focus on point-of-sale issues for both lenders and brokers in the consumer credit sector, looking at elements of your sales process you should be scrutinising as you implement Consumer Duty.
Credit brokers as co-manufacturers
Any Consumer Duty implementation should start with considering whether you are a manufacturer, a distributor, or a co-manufacturer. In many cases this will be obvious: a credit broker who does nothing but make a ‘mere introduction’ to one lender is most likely to be a distributor only. But other brokers – particularly ones with a panel of multiple lenders for a range of credit-scores, could be co-manufacturers in instances where they set prices to be paid by customers or where they agree with lenders the range of APRs they will display to cohorts of customers.
In addition to considering the price and value outcome of the Duty, firms in this circumstance (both brokers and lenders) need to re-visit their contractual documentation and ensure it is clear on who is responsible for APR and price setting. This latter point is clearly set out in the FCA’s recent letter, Implementing the Consumer Duty in the Motor Finance Providers portfolio, and the regulator will be looking for certainty between firms involved in a product and customer journey over which firm is responsible for what, and who FCA can point the finger at if things go wrong.
Explaining the product range
Whether you are a lender or a broker the importance of clarity in how you explain your product range to consumers is equally applicable. Don’t forget the full range of products which you offer, and which could be generically available to customers. Many firms already set out the pros and cons of Hire Purchase compared to Personal Contract Purchase, for example. With the enhanced expectations of the Consumer Duty, firms should work toward assisting customers with tailored explanations of a range of options open to them as individuals – rather than just giving generic descriptions of products.
For example, consider the product range available from your firm, particularly if only Hire Purchase is offered. Should the customer be sign-posted to potentially cheaper unsecured personal loans via their bank or any one of a multitude of other lenders? This will be particularly apparent to customers with good credit scores: why should those customers have finance secured on a car when they could potentially obtain unsecured finance for materially the same – or lower –overall cost of credit?
Car leasing firms should consider how customers are financing a larger upfront deposit and whether this is genuinely affordable to them and in their best interests. Is a clear comparison offered to customers on the total amount repayable when a higher upfront payment is made in return for lower premiums?
Explaining the product
You should also review how you currently explain the credit to customers. Are both the pros and cons of the product available to the customer, along with generic descriptions of alternative finance? Questions you could ask yourself are:
1) At what point in the sales process is the customer informed if they don’t qualify for a 0% finance offer?
2) If the dealer has a panel of lenders, how are these presented to the customer and is it on the basis of APR, lowest monthly payments or total amount repayable?
3) Is the customer cognisant of all fees owing in the overall transaction:
- Price and value obtained by the firm from the sale of the vehicle?
- Fees received through add-ons such as GAP insurance or service plans?
4) How clear are your verbal and written communications to the customer at point of sale? Do they understand:
- the differences between UPL, HP and PCP?
- risks of car depreciation?
- negative equity car finance?
- whether or not they will own the car at the end of the finance term or whether any additional payments are due?
5) Do lenders and brokers adequately track how many customers are charged excess mileage fees at the end of an agreement?
The issues raised above are just examples of the sorts of things which firms in the motor finance sector should be considering relating to their sales process in the run up to the implementation of Consumer Duty.
This is the first of a series of articles on regulatory challenges in the motor finance industry. In our next article, we will look at the customer take-on process and areas to consider in the underwriting and credit worthiness assessment.
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