As motor retailer race towards January 28th and the Financial Conduct Authority (FCA) ban on discretionary commission, questions continue to surface Notable among these are the potential for any limited discretion and ‘rules’ for lender selection that may be feasible. Compliance expert Tara Williams Group Chief Risk and Compliance Officer at AutoProtect Group is very clear, we need to accept discretionary commission is ending and lender selection must be focused on fair customer outcomes and not commission earnings, noting; “The challenge for any discretionary pricing model is threefold: how could such a model be controlled acceptably to meet lender risk requirements? How would an acceptable level of discretion be established? And how could the FCA policies accommodate such a model? I know the dialogue has been continuing on this issue, but I think it is right to question the risk/reward of such an approach.”
The discussion around limited discretion has arisen because the FCA in their Final Rules that; ‘brokers would be able to decide or negotiate the rate with the customer, even if they are not rewarded for it.’ It is a line that while open to interpretation, Tara sees as being most appropriate for special promotional schemes where all customers, subject to underwriting, get a special discounted rate on a particular car/model. She sees any flexibility as fraught with risk and limited if any rewards concluding; “On the more open question about selecting a specific lender from a panel, Tara points to the importance of placing customers’ needs ahead of any dealer commission/financial consideration benefits as the critical guiding principle, concluding;
“The best finance product APR, which accounts for interest rate and fees, for the customer, based upon acceptance should guide lender selection from a dealer’s panel, not commission/financial consideration. The only discretion that might reasonably exist is where the customer’s APR for the product is the same but the commission/financial consideration for the dealer is better. In this situation, there would be no customer detriment.”
Tara further reminds dealers that the increased prevalence of ‘rate for risk’ terms in the market will require close scrutiny on the accuracy of the representative APR used in their financial promotions.
The Representative APR required for promotional purposes is the rate, at or below which, the dealer reasonably expects that credit would be provided under at least 51% of the credit agreements which will be entered into as a result of the promotion. This rate may differ depending on channel of promotion and the ‘trigger’ which commands use of the Representative APR.