The recent interim report issued by the Financial Conduct Authority (FCA) with respect to motor finance provided both reassurance for motor finance lenders and clear guidance on the path the motor finance industry must tread, writes MotoNovo Finance motor division CEO Karl Werner.
Personally, while recognising that some people may see some serious challenges ahead, I can see only positives from the trajectory that we believe is required by the FCA.
The FCA’s interim report was largely supportive of the approach taken by the motor finance industry in areas such as credit and residual value risk management. However, alongside these positives, ahead of its final motor finance report scheduled for September, the FCA identified three areas where it is continuing to investigate: affordability checking, notably for people with lower credit scores; commission arrangements; and transparency of customer information.
Each of these three areas could be seen as creating challenges for dealers, but this is to miss the other side of the threat-opportunity equation. Address these issues in a positive fashion and create a compelling finance proposition for all car buyers.
Certainly, new car finance has moved strongly towards dealer finance over recent years. Today it dominates the way in which car buyers finance their new car. Used car finance has yet to catch up, but it is seeing increased momentum. Overcome some of long-held reservations of dealer finance, in terms of buyer confidence and the future for dealer finance, looks very positive. This is the prize.
The prize is, in our view as the second-largest financer of used cars in the UK, well worth pursuing. This is true for the customer, our dealers and ourselves.
As a business, we have been very public in our moves to realign commission and credit assessment. The fact is that neither is as dramatic as may first be perceived. In the final quarter of 2017, the Bank of England encouraged lenders to become more prudent in their risk appetite. Notwithstanding its call, the facts were clear; after years of lending growth in benevolent trading conditions, the quality of credit applicant was weakening. Adjusting our credit appetite was both morally and commercially the right thing to do. I know that we were not alone.
Changes to commission arrangements are less clear cut, on the one hand, but very clear on another. I like the argument that says paying a dealer commission is simply a ‘cost of distribution’. Where high street banks have costs regarding people and premises, we have dealers. I do believe this argument, to a point. However, I firmly believe this issue is ripe for a fresh and innovative approach where all parties succeed in delivering exceptional customer outcomes.
Our fair pricing approach has been broadly embraced by our dealers, simply because most were unaffected by the change. It is a fact that speaks volumes for the challenge of perception versus reality.
Potentially, there is a case for greater commission transparency because the commissions earned by dealers in the media are seldom as high as those reported. In short, the market has made huge strides in the last decade to eradicate excesses in this area. The balance has shifted to metal profit. In terms of monthly payment, the customer outcome may be little changed, but the pricing transparency is certainly clearer.
On the subject of transparency, as an industry, we must all work hard to improve this area. The media has been critical of PCP mileage and hand-back issues, and while the T&Cs on these areas are clearly stipulated in our documentation and I am sure all others, there can be no room for complacency.
Our long-standing business view is that we embrace regulation. The evidence shows our approach is correct. Doing the bold and innovative thing to encourage change may not have always been popular, but, time and again, it has proved to have delivered for customers and dealers.
Looking ahead, we will continue to champion dealer finance – no clearer evidence being the considerable investment made by ourselves and thousands of dealers in creating www.findandfundmycar.com – and we will continue to work alongside and support the FCA whose primary concern is to ensure customer’s get a good outcome.
When, as a business, you are values-led and your first value is that the customer comes first, it is entirely appropriate; it is also the foundation stone for our growth and the success of our dealers.