The purchase of a car typically involves three interested parties – the dealer, the customer, and the lender. Each has their own interests, and sometimes those interests can clash.
The dealer, for instance, will often regard any customer that enters their showroom or website as “their” customer.
To seal the deal they may try to offer a low price for a vehicle. That will cut into their profits, but dealers can act as a portal to many more products than the vehicle itself. They might cross-subsidise between ancillary products, from the price of a trade-in the customer has brought in, to insurance, to protective cover for the car’s paintwork and, ultimately, enrolling the customer in the dealer’s preferred finance provider.
So while a customer might be drawn in by a lower vehicle price, the dealer can claw some of that money back through the commission they make on the finance.
The customer, meanwhile, sees none of those back-end sums. As far as the customer is concerned, they have stumbled upon a car at a bargain price, and when the dealer offers them financing on top of that, why wouldn’t they shop around to see if they can get a better deal?
So, they go to a broker who offers a better deal on finance, that broker comes back to the dealer, and then the problems begin.
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To keep hold of the customer as a finance customer, which will now form a significant part of the dealer’s commission, the dealer may resort to tactics that are frustrating for the customer – and their finance broker.
“They will say, ‘We can’t invoice through a third party’, and if the dealer won’t raise an invoice to the funder, that makes it tricky,” says Julian Rose, director of Asset Finance Policy. “In a few cases, the customer may agree to be invoiced directly, and then sell the car to the finance company, but that gets complicated.”
This is especially frustrating when the dealer introduces changes towards the end of a deal, which is obstructive when the customer already has money on the line, or the dealer may opt to bring in surprise fees.
“Some dealers actually charge customers a fee for not taking their finance, some even saying it on their website, but customers might not want to take the dealer’s finance because it’s more expensive, the customer might have a relationship with the broker, or they don’t want to disclose their details to anyone else,” argues David Foster, managing director at AngloScottish Finance.
Cause for concern
Perhaps most frustrating is when dealers become obstructive under the pretence of protecting the customer’s interests.
“They might say, ‘We need to see the paperwork to understand what finance agreement you are taking out’, claiming it is their duty to the FCA [Financial Conduct Authority] to make sure it’s a fair deal,” Rose says. “But brokers are far better qualified to do that.”
“We had one dealer we were 3% cheaper than, and they refused to invoice because they claimed they couldn’t be sure we were treating the customer fairly,” Foster recalls.
It is a practice Foster has seen first-hand from a customer’s perspective.
“I’ve walked into a dealer myself and told them, ‘I work in finance’ and still had to sit down with the business manager,” Foster says. “We have got equal, if not more regulations than the dealers as we’re required to have full permissions as opposed to their limited permissions. We can offer more products. We give customers more options. For dealers, finance is a secondary product and they’re questioning people who have full permissions. What we do is a lot more stringent.”
Despite this, brokers report that dealers can be obstinate about keeping finance in-house. Sometimes dealers won’t even accept brokers’ money or will send it back. Often dealers will appear cooperative until the last minute and then won’t send an invoice to the relevant finance company in the hope that the customer will turn in-house to conclude the deal more quickly.
And yet from the dealer’s perspective, they may think they are behaving perfectly reasonably to protect an investment they have already made. What it comes down to, unsurprisingly, are ambiguities in the regulations around dealers’ and brokers’ responsibilities. Both the FCA and competition law come to bear on cases like these, although, for most of the industry, the primary focus has been on the FCA.
To date, critics of government regulation as it stands, “have been rather focused on the FCA side. They are saying it’s not treating customers fairly, which is a key requirement of FCA regulation,” Rose says. “But it is difficult to find exactly which bit of ‘Treat Customers Fairly’ you can point to.”
FCA regulations state that businesses should not put barriers in the way of their customers’ choices, but this guidance specifically refers to the customers’ options after the sale of a finance product, not the sale of the product itself.
“There are other parts of the FCA consumer credit regulations or even principles you can point to and say ‘You shouldn’t be doing this’, but it’s not absolutely clear,” Rose points out.
Foster has also been active in seeking out intervention from the FCA.
“I and many others have written many times to the FCA and nothing happens. But the whole point of the FCA and the upcoming Consumer Duty is to allow customers to shop around,” he insists.
Rose believes that looking to competition law may provide more productive guidance in these cases.
“Under the Competition Act, there are rules against restricting customers’ choices. You’re not supposed to put barriers in the way of people being able to shop around,” he says. “To have a competitive market people need to be able to shop around, but there isn’t really an enforcement body for that. It would need court action, so nobody’s taking any action to deal with it that way.”
Foster argues this is about far more than potential lost business, and points out that AngloScottish Finance is a party to arrangements with some dealers that mean it can lose business when customers opt to go independent, but says that customer choice must be paramount.
“We deal with some dealers ourselves, and we might lose business to a broker when we do, that’s fine. It’s not just about us. The customer should have that opportunity to shop around, because that’s what the FCA and Consumer Duty is all about,” Foster says.
Of course, just because dealers try to keep customers within their own ecosystem, doesn’t mean they always succeed. Foster points to cases of customers walking away from deals, even losing their deposits because they do not want to take the dealer’s own finance. AngloScottish Finance, meanwhile, does its best to support customers looking for other options.
“We have created our own internal list of difficult dealers so we can warn our loyal customers at the outset when there’s going to be a problem,” Foster says. “Recently a shortage of stock means they have customers over a barrel.”
Foster points to one case where AngloScottish Finance had arranged a 0% grant scheme with local councils, which the customer was unable to take advantage of because the dealer refused to invoice for it, leaving a £4,500 grant on the table.
“We went to the top of the chain and told the business manager that this is a government scheme to get clean air in city centres and you’re refusing to do the actual vehicle, but they still wouldn’t invoice it,” Foster says. “In the end, we got around it by the customer buying it outright so we could refinance it on delivery.”
As these practices become more common among dealers, so do these workarounds among finance brokers.
A new Duty
But while on the face of it, these dealers’ practices might appear to restrict customer choice, the FCA’s official position is that motor dealers are free to decide which lenders to engage with in a commercial relationship. While some motor dealers may only have arrangements in place with one lender, and some will have arrangements with several lenders, there is no actual requirement for motor dealers to have arrangements in place with all lenders in the market.
Among brokers, the key hope is that with the implementation of the new Consumer Duty at the end of July, this situation will change.
Rose said the Consumer Duty is about encouraging a holistic approach to the customer journey, not restricted to post-sale, but includes presale dealings. He said: “I think that makes it clear in regards to firms restricting or putting barriers to customers having the choice to use independent finance brokers.”
However, Rose is also quick to point out that the FCA will not immediately have the resources to enforce this, and so the onus is on compliance departments in major groups to recognise the change in regulation and the risks it leaves them open to.
“The car dealer groups are unlikely to get a letter on the first of August saying ‘You must stop doing this’,” Rose says. “So, it comes down to whether the groups as they’re implementing Consumer Duty spot the potential problem and see a gap between what they are doing today and what consumer duty requires. I am optimistic that it will have a big impact. Whether it will solve the whole problem we will have to wait and see.”
Foster, meanwhile, is more cynical about the impact the new Duty will have.
“I think dealers will just continue on because historically that’s what they do,” he says simply.
The position of the FCA, meanwhile, is that the Duty will not impinge dealers’ right to choose who they do business with. Part of the reason for this is that arrangements between the motor dealer and the lender can be complex because the dealer has to arrange for ownership to be passed to the lender, rather than the borrower where the vehicle is to be purchased through a Hire Purchase agreement, and there may be further terms to agree, for instance, which party undertakes ongoing servicing and repairs.
While few brokers depend on business coming through dealerships, it remains a frustrating obstacle for the sector.
“Point-of-sale finance isn’t the bread and butter of asset finance brokers’ work, but when deals do come along they tend to be a good size because they are for new or expensive used cars,” Rose points out. “So brokers spend time finding the best deal for the customer and get frustrated when they can’t see it through. It is especially frustrating when their deal is much better.”
The key wording in the Consumer Duty is that the customer is not expected to receive the lowest price, but “a good result”, and once again there is an ambiguity here. “A good result” might refer to price, but could just as well mean the customer receiving the car they want in the right colour at the right time. If those things are delivered at a price that isn’t exorbitant, it can be considered good value.
However, a key part of that “good result” is that the customer must have access to all the information they need to make the best decision they are able. The FCA require all communications in relation to regulated activity to adhere to the requirements of the Duty – which means firms must support their customers by helping them make informed decisions about financial products and services. Customers must be given the information they need, at the right time, and presented in a way they can understand.
If dealers are giving with one hand through a lower vehicle price with plans to take with the other through in-house finance, they may need to be more transparent with customers about how and why those processes work. And if getting the right car at the right time at the right price means the customer must also select the right finance provider, dealers may need to make customers aware of this from the outset – not after they have signed on the dotted line.