In Focus Risk
Motor finance: pricing discretion and lender choice
As motor finance firms move towards landmark new rules, the industry must maintain its focus on customer benefit
Tara Williams Group chief risk and compliance officer, AutoProtect Group
As motor retailers race, at the time of writing, towards 28 January and the Financial Conduct Authority (FCA) ban on discretionary commission, questions continue to surface. Notable among these are the potential for any limited discretion and ‘rules’ for lender selection that may be feasible. We need to accept discretionary
commission is ending and lender selection must be focused on fair customer outcomes and not commission earnings. The challenge for any discretionary pricing model are:
The discussion around limited discretion has arisen because the FCA in their Final Rules noted that “brokers would be able to decide or negotiate the rate with the customer, even if they are not rewarded for it”. It is a line that, while open to interpretation,
is surely most appropriate for special promotional schemes where all customers, subject to underwriting, get a special discounted rate on a particular car or model. Any flexibility is fraught with risk and limited in any rewards. On the more open
not commission or financial consideration. The only discretion that might reasonably exist is where the customer’s APR for the product is the same but the commission or financial consideration for the dealer is better. In this situation, there would be no customer detriment. I would remind dealers that the increased
prevalence of ‘rate for risk’ terms in the market will require close scrutiny on the accuracy of the representative APR used in their financial promotions.
The only discretion that might reasonably exist is where the customer’s APR for the product is the same but the commission or financial consideration for the dealer is better. In this situation, there would be no customer detriment
l How could such a model be controlled acceptably to meet lender risk requirements? l How would an acceptable level of discretion be established? l 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 and reward of such an approach.
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question about selecting a specific lender from a panel, I would point to the importance of placing customers’ needs ahead of any dealer commission or financial consideration benefits as the critical guiding principle. 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,
www.CCRMagazine.com 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 ‘trigger’ which commands use of the Representative APR. CCR
February 2021
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