It’s no surprise that some unwelcome finance practices take place in some car dealerships. Seven years after taking over consumer finance, the FCA is now acting on one element of this, being extortionate interest rates set by dealers. It’s all a little pointless now, as almost all car finance companies put a stop to when it was first raised, but the measures take effect anyway on 28 January.
What’s the relevance of this to asset finance?
As I noted in my previous blogs on this topic, the changes to commission arrangements affect any broking of motor vehicles - whether that’s done by a car dealer, an asset finance broker, or an equipment dealer. The FCA refused to define ‘motor vehicle’. It suggested this wasn’t an issue for agricultural finance as most deals are unregulated - if only that was true, many brokers would say. Lenders must now decide whether ‘motor vehicles’ means only cars, or cars and LCVs, or anything that has a motor and is allowed on a road. The Road Traffic Act definition seems clear, unfortunately.
For any deals that are affected (the ban on 'discretionary' commission arrangements such as Difference in Charges is limited to regulated agreements, not the much wider definition of regulated broking) it means the broker can no longer be given flexibility to set prices. Given the intense competition in asset finance broking, together with the professionalism of brokers, that won’t reduce prices. What is might do is make some more complicated deals uneconomical for brokers to handle.
At this late stage, there’s still few details available to brokers about how pricing will change in a week’s time. It leaves them with great uncertainty at this most difficult of times.
The biggest change for asset finance brokers is something quite simple, but potentially a nightmare to administer. Instead of the existing requirement to tell customers that commission will be earned (not the amount, just a statement of the obvious that it exists) brokers will have to also explain the ‘nature’ of the commission.
This should be quite simple; a one paragraph disclosure will more than adequately deal with how asset finance broker commission arrangements work (there’s a few details that have to be covered, so my version of this is 125 words). Beware of model disclosures prepared for the motor finance market that rubbish Difference in Charges (DiC) commissions. The asset finance market uses DiC responsibly to efficiently align the work needed to help the customer with the commission paid to the broker. The broker disclosure needs to make this benefit clear.
The disclosure needs to be issued ‘in good time’ according to FCA rules, and the whole point of having it is to help new customers to understand how the broker provides its service. Brokers can put it on their websites, or give it to new customers when they first meet them. That’s all straightforward to do.
But what if each lender dealing with brokers has their own version of this disclosure? Then brokers can’t issue the disclosure when they first meet the customer. Instead, they will have to wait until they have selected the lender. Is this ‘in good time’ as required by the rules? And how well will brokers actually cope with such extra bureaucracy?
With only a few more working days to go, many brokers are still waiting to find out how commissions on regulated vehicle agreements will work from next week, which vehicles are included, and what commission disclosure (or disclosures) they need to issue to customers.
It’s not easy for lenders either, as this all involves system changes. Like most small businesses, brokers aren’t having an easy time at the moment, but brokers have coped with previous changes to the regulations and with funder support they will get through this.
Perhaps with this one under their belt, the FCA can now shift to looking at ongoing bad practices by car dealers, such as the barriers put up by them to avoid customers being able to select more competitive finance offers available to them through brokers. Addressing that issue would be a regulatory change asset finance brokers could actually welcome, and something that would deliver real benefits for consumers.
My model broker commission disclosure is available for lenders. For other resources available to asset finance lenders, please see my website page here