FCA’s Treating Customers Fairly principle spells end for heavy-handed F&I sales tactics, says Paul Smith, Managing Director of dealership key management systems provider Traka Automotive.
The Financial Conduct Authority (FCA) officially took over consumer credit regulation from the Office of Fair Trading (OFT) on 1st April 2014. Last New Year’s Day - 1st January 2015 - saw the first batch of ‘landing slots’ close for automotive dealers, giving them three-months to complete license applications. So by the time you read this most of you will have already completed and submitted your applications to the FCA. Key to this application is your ‘regulatory business plan’.
This plan should demonstrate that your dealership has the background and resources to undertake the business activities with which it is involved, both regulated and unregulated. In addition you must show your firm is staffed with people with the required skills, knowledge and experience; as well as clear reporting lines that make it clear who has responsibility for which elements of the customer journey. It must also demonstrate compliance and risk management and give details on how this is implemented and monitored.
The FCA defines business risk as a factor that may have a negative impact on the operation or profitability of your firm. For a full application you need to list all risks and provide details of how you have mitigated or limited those risks. For limited permission applications it is sufficient to state that there is a risk management and mitigation plan in place.
You also need to lay out a Compliance Manual. The FCA application form details what should be in this manual. But a number of additional elements need to be considered including business continuity planning, prevention of a financial crime and employee responsibility.
All this is before you get into FCA’s principles-based regulatory tenet Treating Customers Fairly (TCF). Over-riding consideration for TCF is putting the customer at the heart of everything you do as a business. For some dealers this may be a big cultural shift.
At the very least it means examining all interactions with the customer to see if they are in the best interests of the customer. In terms of car finance sales it will mean ensuring that any product sold to a customer is suitable for them. It is important to carry out an affordability test if you are selling a car via a PCP for example. It is also important to provide alternative finance options. Any risks or limitations of the finance product must be communicated effectively. All this will require a tightening of business processes and improvements in the provision and clarity of paperwork given to the customer. It will also mean new training for customer-facing staff. Now that nearly 75% of all new cars sold by franchise dealers are being bought with the aid of car finance packages (largely PCPs), getting TCF right in this area is not an option.
Once you have completed TCF compliance work it is also worth going through the FCA’s Key Principles for Business. There are 11 of these most of which are covered above but there are one or two more which have already caught one or two dealers out since the start of the year. A firm must arrange adequate protection of clients’ assets when it is responsible for them. How do you manage access to a customer’s car while in for a service for example? Are you able to provide an audit trail of the movement and handling of their car whilst in your care for example? Modern key management systems such as ours can provide that audit trail, based on key movement logs in and out of secure key cabinets. Is it also worth asking does your insurance cover customers’ vehicles while they are in for servicing or repair?
The other consideration is that your dealings with the regulator must be open and co-operative. You have a duty to disclose information requested by the regulator if the FCA needs that information to verify your compliance with the regulator’s codes and guidance.
There is also talk of the FCA insisting on transparency around commission arrangements on sales of F&I products. Many franchise dealers operate on tight margins today. They continue to combat margin erosion on the car sale itself by placing a heavier emphasis on sales of F&I, incentivising these sales through high commissions and bonuses. If regulation of sales of these products goes the way that regulated financial advice has already gone, the need for full transparency around these commissions today may turn into an outright banning of commission-based selling down the road.
If you are looking for a precedent for this, look no further than the world of regulated financial advice. The FCA banned commission-based selling of life assurance, pensions and investments products (associated with financial advice) at the end of 2013 as part of its Retail Distribution Review (RDR) of that market.
TCF considerations also extend to advertising of car finance offers and the FCA has already shown its intention to clamp down on misleading or incomplete car finance advertising by sending warning notices by emails to some dealers.
What is also clear is electronic reports or paper trails need to be in place to show the customer has been treated fairly at all stages and that they have been placed at the heart of all business processes.
In summary the FCA has outlined six core consumer outcomes that it wishes to see as a result of TCF. These are:
- Outcome 1 - Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture
- Outcome 2 - Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly
- Outcome 3 - Consumers are provided with clear information and kept appropriately informed before, during and after the point of sale
- Outcome 4 - Where consumers receive advice, the advice is suitable and takes account of their circumstances
- Outcome 5 - Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect
- Outcome 6 - Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint