The City regulator’s Consumer Duty has had a major impact on the motor industry and has the potential to continue to be challenging for independent dealers.
As an industry, the automotive finance sector has faced significant regulatory change over recent years. But the FCA’s Consumer Duty, which came into force on 31 July 2023, looks set to be one of the biggest game-changers in recent times.
Consumer Duty aims to improve the way all customers are served – putting ourselves in their shoes and helping them make good financial decisions. To achieve this, Consumer Duty states that companies must ‘act to deliver good outcomes for the retail consumers of its products.’
Roma Pearson, director of consumer finance supervision at the Financial Conduct Authority (FCA), recently stated that Consumer Duty is “not a ‘once and done’ compliance exercise.” Emphasising that the importance of continued development within the industry is crucial in the coming months. She added that the FCA expect dealers to “be proactive, reviewing what you’re delivering over time to learn from what’s working well and to act when you find problems. This includes carrying out regular reviews to ensure that your products and services continue to meet the needs of your customers”.
For the FCA, achieving good outcomes means:
- acting in good faith toward retail customers
- avoiding foreseeable harm to retail customers
- enabling and supporting retail customers to pursue their financial objectives.
The FCA wants to see these good outcomes across four main areas: products and services; price and value; consumer understanding; and consumer support.
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The impact on independent dealers
Offering customers, a great car buying experience should already be a priority for everyone in the industry, and helping them make the right choice, both with their car and their finances is a vital part of that journey. The introduction of Consumer Duty regulations focuses on the outcome for the customers and whether the journey enables them to achieve their goals.
Once announced, significant changes were needed to ensure the dealer was compliant with the new legislation. Franchise dealers often have greater resources to allow them to comprehensively meet these changes. However, independent dealers often have to try and meet these regulatory imperatives while wearing many other hats. Coming to grips with the new communication requirements around the way they talk about their cars and the related finance on the forecourt and on their digital journey, requires a behavioural shift on the part of the independent dealers.
Extensive testing of customer communication has found that a significant proportion of the financial and contractual terminology being used is overly complicated. For example, 22% felt the words ‘settlement figure’ or ‘balance’ weren’t as clear as they could be, and 16% of people found ‘arrears’ a challenge to understand.
Adding to this, Auto Trader also recently found that, of those who are purchasing cars, the younger demographic had a ‘worrying level of knowledge’ of terms used in basic finance contracts. They found that “only 65% of that younger age cohort understood what an interest rate was” and that “only 54% of them understood what a mileage limit” was.
In fact, there were around 17 different terms within finance contracts that were found to have caused confusion with younger customers.
Sharing this kind of data with dealer-partners should support their understanding and approach to their own communications. For example, they can ask themselves how clear and accessible the information in their Initial Disclosure Document is, on their website, or other marketing material.
As well as checking the accessibility of their website, they can also make sure key information is available like their complaints policy, FCA number, and the fees and commission they receive for complete transparency.
Greater transparency doesn’t just support regulatory compliance, however. Greater understanding leads to better, stronger relationships between customers and dealers. Which ultimately results in the customer getting the best possible deal for their own requirements from the dealership. Consumer Duty, when implemented effectively, can promote repeat business as well as expand their local network, through word of mouth and recommendations.
One of the biggest barriers that independent dealers are facing is tracking the customer journey. That’s because Consumer Duty requires businesses not just to deliver good outcomes, but also to demonstrate how they’re doing this. This means having hard evidence that you are meeting your customers’ needs and, in practice, tracking consumer activity every step of the way, both online and in the showroom.
This is a daunting task for some dealers, as they need to demonstrate they have equipped the customer at each point in the decision-making process with all the information they need to make the right decision for them.
Achieving this doesn’t need to be complicated. For example, it could be as simple as having a conversation with customers about affordability and asking the customer to sign a document to say this conversation has taken place. Or, providing an additional written overview of this, either via hardcopy or via email so that it can be further reviewed and digested, if they wish to.
A challenge, but also an opportunity.
We’ll be continuing to support dealers as they grapple with this over the months ahead and will be encouraging them to seek professional advice, when needed, as well as learn from our work and research.
There’s little doubt that even though the official deadline has passed for Consumer Duty, there is work still to be done. For independent dealers specifically, a cultural shift is needed to embed the regulations into day-to-day interactions with customers. While the changes may seem like a challenge to implement, they’re not insurmountable.
When done right, adapting to the new regulations means dealers can provide the best possible customer service and also capitalise on the opportunity to build long-term, loyal customer relationships to the benefit of all involved.
Phillip Williams is the founder and managing director at Oodle Car Finance.