Spencer
Halil, director of Alphera, the multi-make retail finance arm of
BMW Group Financial Services, provides an overview of the
responsibilities under the Consumer Credit Act facing dealers to
help customers understand the type of finance they
buy.
Go deeper with GlobalData
In earlier articles, I have written about
the Consumer Credit Directive (CCD) in the context of a
customer-focused approach to selling motor finance in motor
dealerships.
Now that the final shape of both the CCD and the
accompanying Office of Fair Trading (OFT) guidelines are known, we
can take a closer look at the key issues for retailers and
lenders.
Without doubt, one of the key question marks for
those dealing face-to-face with customers is the subject of
‘adequate explanations.’
What elements are dealers required to explain
adequately? Is there a defined standard of adequacy? What sanctions
might be applied for failing to explain adequately?
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By GlobalDataIn the view of the Department for Business,
Innovation and Skills (BIS), an adequate explanation should “place
the borrower in a position that enables him to assess whether the
agreement is adapted to his needs and his financial situation”.
Moreover, any explanation of credit that starts
orally – such as with a customer in the showroom – must be
completed orally in order to comply with the CCD regulations and
the OFT guidelines. That is, the dealer must give an oral
explanation of all the points as set out in the CCD modifications
to the Consumer Credit Act (see box, below).
BIS has also said it believes that sellers should
orally advise customers to read pre-contract information (taking it
away to so do, if necessary) and also advise them on how to contact
the lender for further explanation if needed.
It will no longer be permissible, for instance, to
leave out of pre-contract explanations issues such as the risk of
repossession if the customer fails to make payments, or the
processes for pursuing them for any net settlement sums they might
still owe after repossession. These must be discussed orally and
not be left for the customer to investigate for themselves by
reading the small print
Customers cannot waive their right to explanations,
although the OFT says in its guidance that dealers and lenders
would not be held responsible where customers ignore advice or give
misleading information in order to obtain credit.
The OFT guidance makes it very clear that sellers
must satisfy themselves that customers understand all the
implications of potential agreements. Customers should also be able
to take information about credit options away with them for further
study.
Having to give equal prominence
to borrower’s responsibilities as well as to the advantages of
credit may seem a draconian change to some, but there are obvious
benefits to dealers and lenders, as well as customers, if the
latter are discouraged from taking on commitments they may struggle
to fulfil.
Moreover, the OFT in its guidance says its
intention is to crack down on sellers who persistently and
deliberately breach the rules. It does not intend to use the rules
principally as a check-list for assessing the validity of
individual agreements.
Whilst the primary responsibility for giving
adequate explanations will rest with the face-to-face seller – the
dealership – finance companies are not absolved from the issue.
They must take ‘reasonable steps’ to ensure that
intermediaries meet the CCD and OFT criteria. Finance companies and
dealers are therefore mutually liable and jointly responsible (as
they also will be, of course, when it comes to the question of
assessing borrowers’ ability to afford credit). Going forward,
effective partnerships between dealers and finance companies will
be key to successfully building business under the new CCD
regulatory regime.
In summary, then, the new rules on adequate
explanations come down to being ready, willing and able to help
customers understand the type of finance they buy and the
consequences of failing to keep to their side of the agreement.
The rules are more than adequately explained in the
OFT guidelines on irresponsible lending, available from
www.oft.gov.uk. BIS has also promised to issue guidance in due
course.
As I have said before, dealers with good,
customer-focused practices and procedures have nothing to fear from
the issue of adequate explanation and potentially much to gain from
playing against hitherto less professional competitors on a more
level field.
The same goes for the overlapping issue of
assessing affordability, which I will look at in the next of these
articles.
