By 28th January 2021, dealers and brokers will need to have adjusted their approach to dealer finance to comply with the new regulatory changes mandated by the Financial Conduct Authority (“FCA”). Central to this change is a ban on ‘discretionary commission models’. MotoNovo Finance, which launched an all-new pricing model, ‘MotoRate’ as lock-down requirements eased in anticipation of the required changes has already seen 754 dealers convert to the new MotoRate approach and the number is accelerating fast as Mark Standish CEO at MotoNovo observes: “The FCA’s intentions for change were well sign-posted and changes to both discretionary commission models and commission disclosure were expected and from our experience in launching MotoRate proactively should be welcomed by dealers. We have seen dealers using MotoRate increase used car finance penetration by 40 per cent, report higher levels of customer trust and enhanced chassis profit. Embracing the changes required can be the catalyst to grow dealer finance, notably in the used car space. We also need to be very public that we are already making positive changes to avoid the type of negative headlines such as ‘’Outrageous’ car loan commission banned’, that we have already seen on consumer media.”
While the FCA has not been prescriptive in specifying the commission models that can be used, they have referenced that this; “could include firms moving to risk-based pricing, provided the broker (including dealers) is not incentivised to set or adjust the rate charged.” This is the exact structure upon which MotoRate is based and which meets the FCA’s stated intention to; “break the strong link between customer interest rates and broker earnings in order to decrease financing costs for consumers”.
In seeking to meet FCA requirements now with MotoRate, the feedback from dealers has been very encouraging and are typified by comments shared by Chris Roach, at Chequers Cars, Lightwater: “I just wanted to drop you a line to go through some of our success working with MotoRate. I thought it best to bullet point the main ways which it has helped us and can help your other dealerships:
- Wrestling business from the ‘bank customers’ almost entirely (in my opinion) down to the rate of 6.9%.
- Ethical selling, on the whole, making sure that the customer receives the best deal on their finance and is rewarded for having a good credit rating.
- Repeat business and more frequent changes of vehicle for the customer based on less interest being paid, so the customer is “upside-down” less often.
- Increase in finance turnover in line with smaller commissions which make up to a higher finance commission over a year long period
- In my opinion, MotoRate ensures that Finance commission will still exist in 10 years’ time.
MotoRate has been a massive success at Chequers. It ties in with our company ethos of treating customers fairly, repeat business is everything to us. MotoRate & our customer service keeps our customers coming.”
In terms of commission disclosure, dealers will need to disclose prominently the existence and nature of commission in their financial promotions (as well as when making a recommendation) where the commission varies depending on the lender, product or other permissible factors. Importantly, disclosure must also cover how the arrangements could affect the price payable by the customer or the customer’s decision. It is worth noting that the commission disclosure rules will apply to other consumer credit sectors, not just motor finance.
Standish concludes; “I know that the dealer finance industry has been making big strides to meet the FCA’s requirements and I’m proud that MotoNovo is leading the call to move to risk-based pricing with MotoRate. As Chris Roach notes, there are big gains to be had from embracing change and in light of the ‘new normal’ increasingly omnichannel car retailing environment, the move to increased transparency in interest rates and the availability of lower rates could not have come at a more crucial time.”