Competition removing dealer restriction access to third-party finance

Last week I shared via LinkedIn a Credit Connect report on the Financial Conduct Authority’s (FCA) actions to force a car dealer, Rix Motor Company, to improve its financial promotions. My comment was focused on the quote the FCA had provided to the press.

Jonathan Davidson, Executive Director of Supervision – Retail and Authorisations, had said “When customers are buying a car on finance, it is really important that they are able to understand how much is going towards the finance and how much is being spent on the car.”

“They always have the choice to get the finance separately, so knowing how much it costs allows them to make informed decisions about whether they are getting the best deal. We will not hesitate to take action where we see adverts that don’t allow customers this clarity.”

The question I asked on LinkedIn was ‘What about when that choice is restricted? e.g. when one of the largest nationwide dealer groups has an official policy (seen in recent emails to brokers) of refusing to invoice third party finance companies?’

That dealer group claims it’s fine because the customer can arrange finance separately – but that ignores the consumer protection available when arranging finance when the car is purchased. It’s as unfair on independent brokers as it is on consumers, I suggested.

This short comment has attracted a lot of interest and comments. The reaction confirmed that the problem is hardly new but seems to have worsened recently.

Brokers and lenders responding reported:

• Over the past four or more years the major motor groups have told purchasers they cannot use external third party funders for a variety of spurious reasons
• One very big non franchised dealer refuses to allow you to buy a car from them unless you use their finance company
• Dealers charging a £500 administration fee to supply an invoice to a third party funder, or allegedly receiving a similar ‘kickback’ from online broker groups

If dealer groups refuse to invoice third party finance companies, this creates two possible customer detriments:

• The customer may be more likely to take out the dealer’s finance offer that may not be in their interests, because its terms or price may be less suitable than alternatives that may be available from other finance companies
• If a ‘workaround’ solution is found, for example the broker stepping into the invoice chain, this is likely to remove the customer’s Section 75 Consumer Credit Act rights

The dealerships have claimed they are actually protecting consumers.

They suggest that brokers who are unwilling to be invoiced are likely to be inferior in some way to those that are happy to do so. One respondent suggested that the FCA or the Financial Ombudsman Service would see a dealer as “complicit” if they agree to invoice a finance house having carried out no oversight of the recommendation, evidence of the suitability of the product or knowledge of the lender. 

I don’t see how this can be the case, although would welcome views. Even if there was any issue with the outside broker or dealer – itself an odd concept, as all these firms are FCA regulated – the dealer is not carrying out a regulated activity in this case. The regulated Credit Broking activity requires a dealer to ‘effect an introduction’ and that clearly isn’t happening when the customer has selected their own finance company (and for completeness, none of the other types of Credit Broking activity would seem to apply).

Given this isn’t a new problem, can we expect any change? The FCA has been informed of this issue previously, one respondent noted.

I believe it could be a good time to call for the FCA to act under their statutory objective to promote effective competition in consumers’ interests in regulated financial services, for the following reasons:

• The FCA quote highlighted above shows the importance the FCA is now placing on customer choice at point of sale in the car market. Whilst it is perhaps unhelpful to suggest what the FCA’s priorities should be, or how the regulator should go about its duties, it seems safe to say that addressing this problem now could bring substantial benefits in terms of promoting a more competitive market and better customer outcomes.
• Whereas up to now this has been a common problem, many brokers report they have historically been able to persuade individual dealerships to invoice finance companies by pointing out to them the FCA requirements to treat customers fairly. For at least one of the largest dealership groups, that seems to have changed recently with instructions from head office to refuse to invoice third party finance companies.  This can no longer be dismissed as a local misunderstanding of group policies.
• Under the newly extended FCA Senior Managers and Certification Regime, those responsible for finance solutions in car dealership groups now have individual accountability to the regulator.

There’s no formal way of asking the FCA to look at this, but the responses over the past few days to my LinkedIn post following the Credit Connect report do at least suggest there’s no shortage of evidence of the problem if the regulator did now decide to investigate.  The remedy could be as simple as a reminder from the regulator to car dealers that customers should be given free choice of finance provider at point of sale.

Julian Rose, Director, Asset Finance Policy