Financial services providers are facing a requirement for greater assessment of customers and a deeper understanding of their circumstances, both at the start of a relationship and throughout the lifecycle. This is being driven by the industry’s new regulator, the Financial Conduct Authority (FCA) and it has now been five months since the new Financial Conduct Authority regulations came into force.
While it’s true that the motor retail sector hasn’t seen any major implications so far, the FCA’s approach is understandably rigorous, so it is high likely that the industry will come under the spotlight if appropriate. It is imperative for firms to be thinking more carefully about their customer interactions and being fully transparent.
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From preliminary findings, the FCA has already identified areas that need immediate attention in areas that touch the motor trade industry. These include general insurance add on products (GIAO), particularly GAP insurance in the motor retail sector, and logbook loans.
The FCA found that GAP insurance offered at point-of-sale was prone to non-impartiality and could be mis-sold through a lack of knowledge both on the sales and consumer’s side. In fact 25 per cent of consumers who bought insurance as an "add-on" were not aware that they could buy the product separately elsewhere. In addition it found the weighted average profit (before tax) for the distributors of GIAO products at point of sale was 62 per cent, compared with 12 per cent for stand-alone GIAO distributors.
In the area of log book loans, which tend to be most popular with people who have a poor credit history and/or are on low incomes, the FCA carried out anecdotal research of providers . It found that there was a need for more rigorous affordability checks if they were going to avoid greater levels of payment defaults and potential for negative long term impact on their customers.
Using this research the new FCA’s regulations and recommendations were drawn up to protect the consumer from being mis-sold finance products. As well as this emphasis on consumer welfare, the FCA also insists that regulations must help to stabilise the market and encourage healthy competition between financial service providers within this industry.
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By GlobalDataIt is important to note that the FCA also plans to improve transparency of its enforcement processes. This means that it will be able to publicly announce that it has begun formal disciplinary proceedings against a firm at an early stage of investigation. With this in mind, firm will need to start thinking about the potential reputational damage they could face.
From our own viewpoint, we can see that the industry is changing – motor traders, insurance providers, lenders and consumer themselves are now more aware of the issues surrounding these financial products. The drivers for change have not only come from the FCA’s proposed recommendations, but also from greater media attention around the need to treat consumers more fairly.
The guidelines in the FCA Handbook go into more detail around the actions that each party needs to take to protect the consumer. Our own view is that there are additional steps that firms could and should be taking now, including the following:
– Look at how your products compare against the competition, both on price and features.
– Ask yourself – are you giving your customers enough of a choice?
– Make sure you understand the earnings and commissions of all parties, including your own dealership staff.
– Put yourself in your customers shoes, does this feel like value for money?
– Review your earnings from these add-on products and measure how FCA recommendations impact your sales.
– It is also worth considering whether add-ons are a viable sales channel. What benefits and earnings do they really give you and would it be better if you outsourced them to specialist insurance and finance providers?
Most importantly, with or without the FCA guidelines, to be a successful business it’s about making your customer happy by providing the right product and offering exceptional customer service. The car buying journey should involve clear and concise information, choice and value for money that enables you to build a long-term trusting relationship with your customers.
Andrew Ballard is a principal consultant at Experian Automotive
