News that the Financial Conduct Authority (FCA), has launched an investigation into the selling of car finance, has, understandably attracted the public’s attention about practises in the market.
It has been prompted following the Financial Ombudsman Service (FOS) receiving more than 10,000 complaints from people worried they had been overcharged. One of the key areas under the FCA’s microscope is the lack of transparency in the disclosure of interest rates and commission structures.
Brokers, dealers and lenders will all be concerned about the potential consequences, with some estimating the bill for compensation running in to the millions. However, regardless of the investigation, there are solutions and services available now which can improve the consumer journey and boost transparency immediately.
The current market landscape
The investigation will look into concerns that consumers who purchased a vehicle using a personal contract purchase (PCP) agreement were subject to ‘discretionary commission arrangements’, which would have seen them charged at a higher interest rate.
These types of contracts were banned from January 2021, and consumers’ mis-selling claims not related to commission won’t be considered, for example if a customer is complaining that their affordability assessment wasn’t carried out correctly.
In the vast majority of cases, PCP works extremely well for consumers, enabling them to finance and regularly upgrade their vehicle at a cost which is appropriate for their circumstances.
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However, there are still cases where solutions available in the market enable brokers to choose deals based on commission rates at the expense of the consumer. This, combined with the fact consumers often find themselves navigating complex contractual terms that may not be clearly explained, leading to misunderstandings about the true cost of their agreement, means consumer outcomes are not as fair and positive as they should be.
Why transparency and eligibility is the key to a fairer future
How can dealers and brokers resolve this situation and ensure that they don’t encounter more difficulty in the future?
Any solution has to be centred around transparency and eligibility. The consumer should be presented with full details of the offers the dealer or broker has received from lenders, including any commission. These offers should be based on the consumer’s eligibility and suitability for the product offered.
Eligibility solutions already exist and are available on the market, something which Experian excels in. Only offering products that the customer can afford means they can be confident they are getting the best deal for their circumstances.
From a consumer perspective, it’s important they are aware and understand all the options available to them. Latest data from Experian found that there were more car finances choices available in January compared to December across our car finance marketplace, so consumers can quicky and easily compare offers, again, based on loans that they are already eligible for without it affecting their credit score.
Moving to a model of full transparency of offers available at the point of sale – something which is commonly seen via price comparison sites in other markets such as personal loans – would bring about better consumer outcomes and ensure that deals and brokers aren’t operating in a grey area, which could result in further negative consequences in the future.
Whatever happens with the FCA’s investigation, the time for dealers and brokers to act is now.