What does the FCA car finance “crackdown” really mean?

Last week, the Financial Conduct Authority (FCA) released a consultation paper which challenged how car finance providers earn commission. They’ve suggested that the level of clarity the consumer receives from our particular area of the finance industry needs re-visiting. We sat down with our managing director, Peter Brook, to understand what this means for you.

“Like most regulators, the FCA is actively trying to get the best outcome, quite rightly, for the consumer.”

Peter explains more:  “As suppliers of car finance, our funding is allied to the supply of a motor vehicle, unlike other finance markets. There’s a lot of moving variables in the transaction for example; the part exchange price, discounts on supplied vehicles, ‘free’ accessories etc, which makes it difficult for a customer to make an informed decision.”

How do lenders and brokers make money?

In the car finance industry, there are three main drivers that determine how the lender or broker profits from a transaction:

• the amount of money borrowed
• the amount of time that the agreement will be in place
• the interest that’s being charged on that money

The consumer has control over the amount borrowed and the term, but at the stage, has limited choice over the interest charge. The interest is usually calculated on a “risk-based approach” taking account of your credit rating and several other factors.

Empowering the consumer

The FCA is keen to remove the conflict caused by higher interest rates leading to higher rates of Commission. One proposal is that brokers and dealers should be paid a fixed rate of commission, regardless of the interest rate charged to the consumer.  However, at this stage, there has been no change to legislation and the FCA are consulting with the relevant industry providers.  As part of that process, Oracle Finance will be responding to their recommendations by the early part of next year.  Having mystery shopped a number of motor retailers and brokers, the FCA also found that across the industry, it isn’t always made clear to the customer that finance providers earn a commission.

As Peter explains:  “This is damaging for our industry.  At Oracle Finance, we always state what we do and we’re clear that we earn a commission for transactions.  We’re actively abiding by the current legislation”.

Media Coverage

Although the FCA has been working on the consultation for around two years, it only hit the media last week.  At Oracle Finance, we’ve noticed the press coverage about the ‘crackdown’  has led to a level of customer confusion and concern about their current finance agreements.  Peter explains more:  “The media reporting suggested that there had been a ‘ban’ on certain types of car finance, which is simply not true and showed a lack of understanding of the FCA’s proposals and aims”.  Unfortunately, it wasn’t always clear from the coverage that, at this stage, this is only a consultation paper upon which they are requesting feedback from the industry.

What next?

It’s difficult to say what this means exactly for the customer at this stage and whether or not the proposed action will lead to a better customer outcome.

Similarly, it’s equally as difficult to understand what this means for the finance industry. “Until things crystallise, we can try to plan for different scenarios – but we can’t make a firm plan unless the FCA finalise their proposals”

We’ll keep you posted on developments connected to the FCA consultation. If you require any clarification, please do not hesitate to contact your Account Manager.

To understand more about the car finance industry, visit our FAQs.

Recent media coverage about the FCA consultation paper: BBC, Telegraph, The Guardian