The automotive retail sector should brace itself for a Financial Conduction Authority (FCA) investigation with at least one dealership group likely to come under scrutiny.
“It is what we have seen in other sectors, such as mortgages and payday lending.
“A well-known company or group is investigated and held to account,” said Andrew Smith, managing director of Consumer Credit Advisory Services.
Returning to the F&I stage at this year’s Automotive Management Live, following his presentation at last year’s F&I conference, Smith says the past 12 months has seen practices evolve and pitfalls identified as dealers, compliance companies and finance providers continue to grapple with the challenges of the FCA’s ‘treating customers fairly’ or TCF philosophy.
“The FCA will go back and regulate the businesses which were first approved.
“The FCA now has much more industry knowledge than when they first took over responsibility for consumer credit and they perhaps did not interrogate some areas with as much intensity as they will do now.
“It’s not so much that there are illegal practices at work, but a lack of evidence of what constitutes TCF and how that manifests itself in the dealership.
“The key to adhering to TCF is the customer journey and ensuring the customer is absolutely sure of the route to finance and the capacity in which the firm they are directly dealing with is acting. For example, are they merely an introducer, or a broker or are they a dealership with a direct funding facility with a manufacturer?”
Once the FCA refocuses its attention, currently diverted by high cost short term credit, debt management and advice, and pawnbroking, Smith fully expects a large dealer group’s practices to be scrutinised and if the entire process is not clear, transparent and evidenced without any potential risk of detriment to the customer, enforcement action can be expected to be imposed.
One area which gives cause for concern, according to Smith, surrounds business from brokers and whether the customer is aware of who is funding the vehicle.
Effectively, the customer needs to know the broker is handing the business to the dealer who sources the finance, often through the manufacturer approved finance scheme.
If a broker does not have the correct FCA permissions in place and the consumer has not been kept fully informed, dealers can find themselves in a position of non-compliance if they are fulfilling the finance business without conducting and evidencing suitable due diligence on all those who introduce regulated business to them.
If a customer believes the broker has a direct line to manufacturer funding, rather than accessing it via a dealer, there could also be an issue for the broker in terms of FCA compliance, and potentially a breach of data protection rules if the correct ICO (Information Commissioner’s Office, the UK independent organisation which oversees public information rights) license is not in place.
“If it is not obvious to the customer who is financing the vehicle, there is a risk this could be seen as misrepresentation,” commented Smith. “It sounds simple, yet it’s rife, we frequently come across these sorts of practices which are likely to be viewed by the FCA as being in contravention of its rules.
“Frustratingly, a high proportion of dealers are delivering exceptional service and customers are happy with the way they have been treated, but if it’s not recorded and the customer journey isn’t evidenced and audited, dealers can find themselves in very tricky positions. If they don’t record it, it can’t be proved and that’s where we will see dealers falling foul of the rules.”
Other areas which Smith believes will come under the FCA microscope are the GAP regulations with some dealers wrongly believing that as appointed representatives, the four-day rule does not apply when GAP is sold at point of sale.
Additionally there are a high number of independent dealerships, both new and used cars, who pass F&I business through to funding organisations, and advertise this facility on their websites, however either they don’t hold any permissions at all or their FCA permissions are incorrect.
In some cases these firms also do not hold the correct data protection license with the ICO to allow them to pass customer information to a third party in this way.