More finance regulation can be good for business

by Jerry Page, Head of Compliance, i-Comply online

Dealer finance is gearing up for potential change in the year ahead as we await the publication of the FCA’s findings into its review of motor finance.

Having worked on both the finance company and retailer side of motor finance, my position on any potential change is clear – I welcome it.

Regulation has been good for dealer finance

In my experience, an increase in regulatory control and compliance has run parallel with an increase in the value of finance as both a marketing tool and profit centre. Certainly, the growing popularity of PCP finance and more recent PCH have been major factors, but we must remember that PCP finance was available long before the upturn in dealer finance achieved over the last decade. My contention is that a higher level of confidence and trust by OEMs, lenders and consumers has combined to improve the reputation of dealer finance. Without doubt, the increase in financial regulation has played a role in improving this level of trust.

While new car finance is seeing unprecedented levels of finance penetration of circa 90 percent, used car finance, while improving, is still lagging behind at an estimated 20 – 30 percent level. Since used car sales outnumber new by around three to one, an improvement in dealer finance performance is a prize well worth pursuing.

Another reason for dealers to embrace any developments in the regulation of motor finance is to help address the growing disruptive threat of online car aggregators, which are leveraging monthly affordability aggressively in their marketing; dealers need to take heed and take the high compliance ground to compete positively.

The areas of FCA focus

When the FCA published its motor finance review update on March 15 last year, it identified three areas that it was set to focus on as it moved to conclude its assessment of the market:

  • Whether firms are properly assessing whether customers can afford to buy the car they are being offered – particularly for people with lower credit scores.
  • How firms are managing the risks around commission arrangements for dealers.
  • Whether consumers’ engagement with firms, and the information they are given, allows them to make informed decisions.

The FCA is widely expected to announce its conclusions by the end of January and inevitably there are varying degrees of speculation about what they will say. If there is one thing I have learnt from extensive experience, it is that you should never try and pre-guess the results of a regulatory review! However, I have also learned never to be afraid of the outcome either.

Assessing each of the areas in brief, my observations are:

  • Affordability – in today’s review-driven environment a dealer’s reputation is worth far more than putting a potential customer into a car they cannot afford. Honesty pays off, putting the customer into a lower value car is invariably the best route forward.
  • Commission – it is a thorny issue I have no doubt but as other areas of financial services prove, removing undisclosed commission does not destroy value, it helps to create it.
  • Transparency – absolute transparency is a winning hand. Holding back information on, for example, PCP mileage or end of contract terms is a recipe for future problems.

To conclude, I’m looking forward to the FCA’s announcement; the certainty it will afford is good for everyone and for those who embrace it, it can help to create a long-term strategic impetus for future sustainable growth.