Get ready for new FCA rules for car retailers

In July 2022, the Financial Conduct Authority (FCA) announced the final details of a new Consumer Principle that requires firms to deliver good outcomes for retail customers. Naturally there’s a major impact on finance companies, but car retailers and other introducers (eg. brokers) have similar obligations and should be putting plans in place now to ensure they conform.

The rules come into force on a phased basis: For new and existing products or services open to sale or renewal, the rules come into force on 31 July 2023. For closed products or services, the rules come into force exactly a year later.

Unlike other car retailer requirements, the Consumer Duty obligations may not be easily understood as they are based on the ‘How’ as well as the ‘What’. For example, an authorised garage can only pass tyres during an MOT that have a minimum tread of 1.6mm, which is measurable and physically evidenced.

However, proving you have provided a good outcome for your customer when arranging finance can be more difficult.

You will need to prove good outcomes that relate to:

• Products and services
• Price and value
• Consumer understanding
• Consumer support

The FCA rules require “firms to consider the needs, characteristics, and objectives of their customers – including those with characteristics of vulnerability – and how they behave at every stage of the customer journey. As well as acting to deliver good customer outcomes, firms will need to understand and evidence whether those outcomes are being met.”

Last year, new FCA legislation came into force which removed the ability for an introducer to influence the interest rate being charged to the consumer. This was a positive step to improving consistency and transparency, and without doubt has led to better customer outcomes. However, the debate in terms of a fixed rate for all versus a rate-for-risk model, where the rate is determined by the customer’s credit rating, is a debate for another day!

What it means for you

So what do car retailers need to consider? In short, absolutely every process needs to be reviewed and measured against the new requirements.

Firstly, this needs to be on every company’s board agenda as a standard item, and given high priority as the FCA will be looking to see genuine buy-in from business leaders. There’s a deadline of 31 October 2022 for boards to agree their implementation plans and provide evidence that they have scrutinised and challenged the plans to ensure they are robust and deliverable to meet the new standards.

Car retailers should be engaging with their finance company partners to understand what they’re doing and what requirements may be needed to satisfy their additional needs. If not fully in line with the new FCA rules, your actions as introducers could have a profound impact on the finance company, and failing to comply could result in significant costs in terms of finance and reputation for both parties.

In terms of the right finance product, clear evidence is needed of the customer being taken through the options available, and then choosing the right product for their requirements is vital. For example, a four-year PCP agreement for a customer who always keeps their cars for seven years would be inappropriate.

Also, clear evidence of taking account of the customer’s financial position remains central to the process. The question to ask yourself is are you offering the best product for the best outcome for your customer? This will be even more important as we see the impact of the rise in the cost of living, which will be particularly relevant in the non-prime finance arena, where more vulnerable and less financially able customers will be hit the hardest.

Most current finance proposal systems provide good data and process evidencing, but you should review these against the new requirements.

The word ‘evidence’ crops up a lot when speaking about the FCA new rules, but rightly so. All areas of the decision making process, including what’s been presented to the customer, must be held securely and ready for any audit requirement.

One point that appears to be inconsistent across our industry is post-sale customer follow-up. Of course, a regular feature is a call or email to check on the sales process and ensure the customer is happy with the car. These can be from the OEM for a new car or the car retailer and finance company for a used car. But are these communications retained for any future challenge?

Everyone’s a winner

Equally, the questions need to be refined to ensure you can evidence important matters such as whether all the finance product options were clearly discussed, and whether the introducer advised that they receive commission on the finance agreement. If not, these should be incorporated, if for no other reason than to protect your business from potential future claims from no win-no fee law firms.

These new rules must be taken very seriously, but don’t be daunted. There is help out there to ensure that your business is compliant. Remember that good customer outcomes are also good for car retailers, as a happy customer is far more likely to return, enhancing customer retention.

Embrace these new rules and everyone wins.

Peter Cottle FIMI is Consulting Director at finance advisory company Finativ

This is an edited extract from IMI's new MotorPro magazine, received free as part of IMI membership.