With the Financial Conduct Authority (FCA) ban on discretionary question looming, AutoProtect Group have sought to provide greater clarity over several areas implicated in the regulatory changes.

The ban, which comes into place on 28 January, has raised particular confusion surrounding the potential for any limited discretion and ‘rules’ for lender selection that may be feasible.

Tara Williams, group chief risk and compliance officer at AutoProtect Group, sets the record straight: “The challenge for any discretionary pricing model is threefold: how could such a model be controlled acceptably to meet lender risk requirements? How would an acceptable level of discretion be established? And how could the FCA policies accommodate such a model?

“I know the dialogue has been continuing on this issue, but I think it is right to question the risk/reward of such an approach.”

According to the FCA’s Final Rules, brokers would be able to decide or negotiate the rate with the customer, even if they are not rewarded for it. Open to interpretation, the clause has led to doubt amongst dealers.

Recognising that any flexibility is loaded with risk, Williams deemed the line as being most appropriate for special promotional schemes where all customers, subject to underwriting, get a special discounted rate on a particular car/model.

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Turning to the issue of selecting a particular lender from a panel, Williams is explicit on the importance of prioritising customer needs, ahead of dealer commission: “The best finance product APR, which accounts for interest rate and fees, for the customer, based upon acceptance should guide lender selection from a dealer’s panel, not commission/financial consideration.

Williams continued: “The only discretion that might reasonably exist is where the customer’s APR for the product is the same but the commission/financial consideration for the dealer is better. In this situation, there would be no customer detriment.”

Despite the increasingly pervasive use of ‘rate of risk’ terms in the market, dealers should expect close scrutiny on the accuracy of the representative APR used in their financial promotions.

The Representative APR required for promotional purposes is the rate, at or below which, the dealer reasonably expects that credit would be provided under at least 51% of the credit agreements which will be entered into as a result of the promotion.

This rate may differ depending on channel of promotion and the ‘trigger’ which commands use of the Representative APR.