FCA ban should lead to innovation in motor finance technology

The FCA ban on motor finance discretionary commission models should be a wake-up call to focus on technology innovation in the buying process.
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Covid-19 is being used as a smokescreen and/or scapegoat for many things, positive and negative. It’s sometimes hard to tell the difference between the two, but it’s difficult to argue with the fact that the pandemic has directly and indirectly influenced much about how society has functioned during its young lifespan. It was recently being used as leverage by senior leaders in the motor industry to account for a loss in dealership revenue, and the UK government’s green plan schedule was tacked on for good measure.

While many were largely supportive, some said the 2021 budget failed to offer support “to transform the industry” and to meet the government’s green recovery plan and net zero aspirations.

I’m not a great advocate of assigning blame where innovation doesn’t regularly occur because I believe innovation is often what happens where uncertainty prevails. However, politics and regulatory frameworks play their part in how things change, and the Financial Conduct Authority’s review of motor finance over the last few years has shown that there’s a lot to be achieved in a relatively short time. And much of it is in the hands of motor industry leaders themselves, pandemic or no pandemic.

While Covid-19 may well have affected dealerships, it also affected the release of the FCA’s ultimate decision on banning all discretionary commission models in motor finance. But it’s here now, so let’s look at what it means to the motor finance industry, what it means for digital innovation, and what it means for the customer.

Clarity around communication

Jane went to a showroom to buy a car. With her heart set on a specific model she had read about and researched, she had a test drive and felt confident. The salesperson suggested testing another model, which was more expensive but had a better seating position, more luggage space and a parking camera as standard. The extra costs, Jane was told, will be soaked up by “the better finance terms we can come up with to make sure you drive away a happy customer”. It all sounded amenable and affordable.

What the FCA discovered during its review of motor finance industry practices in 2017 is that the customer isn’t given all the information they need about how a particular finance deal is structured. Jane doesn’t know how much extra commission the dealer is making from the lender and hiding it within the interest rate Jane will have to pay. This is because the dealer (or broker) could set the interest rate and inflate their commission.

The likes of Jane cottoned on to the system being gamed in favour of the dealers. The BBC published an article in 2019 that anecdotally revealed how customers are upsold cars they can’t necessarily afford over the longer term, with no affordability assessment having taken place when the deal was being negotiated. The story underlines how it affected the whole family, not just the person who bought the car, as mum and dad tried to cover her outstanding costs but fell short themselves. Figures show the number of complaints to the Financial Ombudsman Service increased 54% in a year, from 5,805 to 8,943. People simply didn’t know what finance deal they were signing up to as it was complicated, mis-sold or disguised (and probably a combination of all three).

The requirement for transparency is now addressed by the FCA’s ban on broker discretion, so that customers have more access to the right information such as pre-contract disclosures, thorough explanations and how the finance breaks down, as well as appropriate and morally sound affordability assessments.

Scrutiny of affordability criteria

Failing to meet obligations around customer transparency costs the motor finance industry a lot of money, as well as the cost of negative headlines. But as an Equiniti articlepoints out, affordability isn’t always easy to prove. So, even if dealers want to do the right thing, the criteria for assessing whether a customer can afford to finance a car isn’t itself the best model. The FCA is being urged to “revisit the affordability criteria used on customers who have fallen into arrears” to recognise trends and patterns that could inform a better outcome for everyone involved in the finance deal, from lender to broker to customer. More detailed scrutiny of the process should inevitably iron out the wrinkles in the model, but it needs to be the motor finance industry itself that self-regulates in this way to achieve success.

An FCA statement highlighted the need to continuously monitor the market and “look closely at any attempt by a motor finance firm to introduce a commission model that could lead to the same harm that we have sought to ban”. Its review of commission arrangements and subsequent action on how to go forward is a significant industry game-changer. The lack of compliance around regulatory requirements has been addressed and this should help the customer avoid falling into an unaffordable debt spiral.

Yet, the ban applies to personal contract purchase (PCP) finance plans and not personal contract hire (PCH), which doesn’t require an affordability assessment. It’s ripe for exploitation, and this is something the FCA will (and is being asked to) closely monitor. But there are better ways to ensure all financial processes are smooth, and this is where digital processes play their part.

Customer demand for digital is high

Physical dealerships closed during the pandemic because they rightly fell under the banner of “nonessential retail”. This had a huge impact on the motor industry, with £20.4bn lost in turnover from the beginning of lockdown in 2020 to a year later. Diesel car sales fell by more than 50%, petrol by 37%, but electric and plug-in hybrid car sales increased threefold from 2019 (sales were 1 in 30, which improved to 1 in 10).

While the electric vehicle market is enjoying its much-anticipated tipping point, innovation around the buying process is still stunted by traditional finance models. As customers, we’ve enjoyed being able to research cars online, customising them with various paint colours, fancy trim, heated seats, sunroofs and self-parking, and we’ve been able to do this sort of thing for years. And many car brands shifted their market exposure to high-footfall environments such as shopping malls, where you could experience a similar level of excitement in a smaller, more technology-driven sales area. Customer demand for digital experiences to be more like retail and media is driving many industries, and car brands have clearly recognised this. What hasn’t been available as a mass market prospect is the digitalisation of the car buying process. That is, until now.

Technology is fun, but it needs to be relevant to be a practical solution. In our motor finance example, it needs to be useful in providing the transparency a customer needs, as well as a smoother and more compliant journey for the salesperson. As mentioned in a recent post, Tesla and Volvo offer great customer journeys in terms of being able to go from point A to point Z in the buying process, managing affordability expectations while remaining compliant to region-specific regulations.

Volvo recently launched an impressive marketing campaign around its core strategic aims, including being fully electric by 2030 and switching to being completely online. The Volvo video presentationis definitely inspired by Apple’s lockdown presentations, but behind its artful and unusual approach, key messages are repeated. Volvo not only sees the future as electric, it sees the future of car buying as dealership-free, with insurance

“We also need to listen to our consumers. They expect transparency and a seamless experience getting and having a car. That’s why all pure electric cars from Volvo will be available only online at preset prices. You can subscribe or buy. They will come with a special customer care package.” This package includes insurance, maintenance, warranty and (where possible) home-charging stations. It’s a slick presentation built for people accustomed to embracing technology ecosystems, as well as for seasoned car buyers who may welcome a changing of the disconnected old guard to something more tangible, connected and trustworthy.

Make digital exploration your mission

A lack of trust in physical dealerships has played a part in people wanting to buy their car using technology rather than human interaction. With fixed costs right in front of you, there’s no haggling to be had, nor deals to be done. All parameters are transparent and clearly explained. Of course, it means you may not be able to afford your dream car after all, but at least you won’t fall into crippling debt at the hands of a greedy broker.

As customers reach inexorably towards a more digital path for every corner of their life, it’s imperative the motor finance industry does the same to remain relevant and profitable, and to regain some of that lost trust in the system.

A lack of focus on the customer has led to a lack of digital exploration over the last few years, and Covid-19 lifted the lid on many sectors’ neglect of forethought. If the FCA has done anything with its commission structure review, it’s highlighted that there’s a new path of innovation to explore beyond the confines of traditional showrooms, and it’s down to the dealers themselves to stay up to date to survive.

Photo by LeManna

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