Today marks the implementation of the Financial Conduct Authority’s (FCA) ban on motor finance direct commission models, and while many dealers may prefer to retain a single rate or banded pricing model, the push towards risk-based pricing is undeniable.
According to independent finance company, MotoNovo Finance, a “one size fits all” approach means that customers receive a rate that is not tailored to their circumstances which often results in the customer paying a higher rate.
Mark Standish (pictured above), chief executive officer at MotoNovo Finance, said: “While I understand the simplicity appeal of a single rate or banded pricing model for finance; for me, the risks to the future of dealer finance heavily count against it. It is not a sustainable approach in today’s digital age when customers have such easy access to price comparison sites and personal credit data information.”
The most significant barriers to the adoption of a risk-based pricing model are centred upon technology, verifying the risk model to account for individual and vehicle risks. However, according to Standish, “embracing change is part of our culture.”
He continued: “While change can present risks, in this case, the risks of not changing, even in the short term, looked far higher. From a regulatory, technical and above all customer perspective, we concluded that for the future well-being of dealer finance, the connection between the borrower and their risk profile had to be recognised.
“The mean average approach inherent in a single rate pricing model is unlikely to appeal to the prime credit quality audience who represent a prize to be gained from risk-based pricing. Inevitably the single price would need to reflect the audience of people taking finance. Without the prime audience, the implication is that price at an individual and overall APR level could well become higher than they might have been. In turn, this would have long-term implications for the dealer finance model and its reputation.”
Boosting market share
Rather than seeing dealer finance risk such a slippery slope, MotoNovo is confident that the opportunity afforded by risk-based pricing is to welcome a broader pool of customers to the unique benefits of dealer finance, increasing market share.
Standish concluded: “Risk-based pricing for us was not a quick fix. MotoRate was two years in development and it is why we expect a trend to risk-based pricing to emerge as other lenders develop their infrastructure. Right now, we are well-placed to help dealers to benefit from that ‘early mover’ advantage.”
Is asset finance ready?
The FCA’s ruling also affects the asset finance market as 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.
Julian Rose (pictured above), director of Asset Finance Policy, explained: “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.
“For any deals that are affected 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 it might do is make some more complicated deals uneconomical for brokers to handle.”
A nightmare to administer
According to Rose, the biggest change for asset finance brokers that could represent a “nightmare to administer” is that brokers will have to explain to the customer the nature of the commission.
He said: “A one paragraph disclosure will more than adequately deal with how asset finance broker commission arrangements work. It 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? It’s not easy for lenders either, as this all involves system changes.”
