In the current jargon of finance, warranties and insurance, it’s described as being ‘in scope’ or ‘out of scope’. In other words, which parts of the add-ons to selling cars are covered by regulations policed by the Financial Services Authority and which are excluded?
Like most legislation, there are grey areas and critics say the FSA is not providing enough guidance to dealer-ships when the scope gets out of focus. As Barry Hogg, motor trade manager for insurers Norwich Union, put it: “The regulations have made what was a relatively simple business more complex as far as the motor trade is concerned. Matters aren’t helped by the FSA giving a broad brush response to specific inquiries about what is covered by the law and then advising dealers to seek advice from their own legal sources if they want more clarification.”
Commented Tony Worthy, a consultant in compliance services: “Dealers are told they must comply with the law, but there are no specific guidelines to ensure they are compliant.”
Most vocal critic is the Retail Motor Industry Federation, which claims that the regulations are not only harming its members’ profits but are also acting against the interests of the very people they were designed to protect – the consumer.
Federation chief executive Matthew Carrington warns that the amount of FSA red tape may result in many dealers abandoning sales of warranties and insurance, despite the fact that they provide a useful prop against the decline in new car profit margins.
Carrington’s prediction follows a Federation survey which found that the annual cost of compliance is costing dealers an average of £4,600 a year, almost half their average annual profit from insurance and warranty sales.
Out of the survey respondents, 89 per cent claimed the regulations have increased the time it takes to sell insurance, a quarter report a drop in income from insurance sales, and just over half say the regulations have given little or no benefit in relation to the cost of compliance. Typical of dealer comments accompanying the survey returns were: “Yet another burden on our business…. yet another bureaucratic nightmare that benefits no one.”
Norwich Union’s Barry Hogg said the £4,600 cost cited by the survey was “above the line” and didn’t reflect the cost of management time and processes to ensure compliance. “The regulations are a good example of taking a sledgehammer to crack a nut,” he said. “The amount of paper documentation required must account for all the trees in a forest. The FSA was originally set up to look at the pensions business. Now this has been shoehorned into general insurance and that’s like comparing chalk with cheese. It all stems from yet another directive from the European Union and, typically, the French have chosen to ignore it.”
But Hogg went on to explain that if franchised dealers were to dismiss the FSA’s presence, they risked going out of business. “Their agreement with manufacturers includes being able to offer insurance products, so if they fail to meet FSA compliance and have their licence withdrawn, this could mean the loss of the franchise.”
Louise Wallis, who is with the RMI’s government affairs unit and who carried out the survey, said: “If nothing is done to ease the burden of compliance, we could see dealers leave the insurance market in significant numbers. If this happens, those dealers risk losing a certain amount of core business as many consumer have come to expect to be able to purchase insurance at the same time as they buy their vehicle.
“The RMI is not advocating wholesale change, but we do believe that a lot can be done within the existing framework to bring the scope of regulations into line with the size of the market.” She added that the RMI would be using the survey evidence in its talks with the FSA.
Tony Worthy said dealers not only had to grapple with the ambiguity of some aspects of the regulations, but also the complexity of the paperwork and the reporting requirements. “I know of some companies who have chosen to ignore the reporting side and been fined. I understand the Scottish Motor Trade Association is planning to run courses to familiarise members with the reporting process. To someone unfamiliar with all the form filling, it can be a daunting task. The FSA says it intends to reduce the amount of bureaucracy, but there’s no sign of it happening.”
Worthy does, however, put forward a defence of regulation. “The procedure brings to the consumers’ attention vehicle cover, such as GAP insurance, which they may not have been aware of and I know of instances where it’s actually led to an increase in finance and insurance revenue for the dealers.”Ian Storm, commercial manager with Giles Insurance, supported Worthy, commenting: “It provides both protection for the dealer and an advice line for the customer. The customer is required to give a signature, confirming that they have been given, and understood, the services offered, so everything is in black and white – the customer can’t go back and say they were misled over some part of the agreement.”
Storm acknowledged, though, that the regulations were “too generic” and said it would help dealers to have rules that were more specific to the retail motor trade.
Finance: the crisis deepens
No one in the motor finance sector has yet come up with a really effective counter-attack to the direct lenders, reports Arthur Way.
Around 300 delegates in the motor finance business were booked to attend a ‘summit’ meeting in London earlier this month to address the deepening crisis in point-of-sale lending. Organisers the Finance and Leasing Association report that new cars sold on finance by franchised dealers since 1997 has dipped from around 50% to 40%, while used cars sold on finance by independent dealers has plummeted from 40% to 20% over the same period. FLA director general Martin Hall notes that finance and insurance typically accounts for around 26 per cent of dealer profits.
Desperate times call for desperate measures, but not to the extent indicated in a recent survey by What Car? magazine. Despite tougher regulations affecting finance, insurance and warranties, the magazine claimed that car buyers were still vulnerable to the type of mis-selling deals that have bedevilled other parts of the financial services industry.
Motoring magazines have played a critical role in something which is far more damaging to point-of-sale lending, though. It’s the volume of advertising they (along with other consumer publications) carry from the ‘high street’ lenders. And that’s before internet savvy users begin browsing to compare the best deals. Alliance & Leicester, Cahoot, Co-operative Bank, Northern Rock and Sainsbury’s Bank, for example, are all offering rates in the 5.8-6.1 % range for a typical £10,000 loan over 36 months.
Despite the relentless decline in point-of-sale finance, dealers at least had the small consolation of maintaining their commission. But the mood among lenders now is that fewer crumbs should be offered from the shrunken cake. It all makes for an increasingly fractious relationship, reflected in the latest used car finance survey from Sewells. The ‘satisfaction’ rating among franchised dealers fell from 80.1% in 2004 to 77.8% last year, with the rating among independent used car dealers dropping from 85.6% to 82%. The fall may have been more pronounced had it not been for some providers – notably DaimlerChrysler Financial Services and Close Motor Finance – being cited for “exceeding expectations” among the 936 dealers who took part in the survey.Dealers and motor finance houses are naturally anxious to stage a fight-back against the direct lenders, but there’s a difference of opinion over strategy. Dealers tend to favour the ‘one-stop’ financial package to include vehicle funding, warranty, insurance and so on. Finance houses are sceptical of this approach for a variety of reasons, not least the complexity of bundled products and a preference among consumers to choose individual components, due largely to cost factors.
On a more positive note, there’s evidence of finance house initiatives packing a more effective punch. According to Black Horse Motor Finance, 90% of dealers in its Approved Dealer Programme report an overall increase in finance sales, with 60% noting a “significant increase.”
As always, conditions for the independent finance houses have been compromised by the ‘captive’ groups whose deals – including a blizzard of 0% offers – shows no sign of diminishing. No sooner had the New Year started than GMAC announced a mouth watering portfolio of offers which will run until the end of March across the Chevrolet, Saab and Vauxhall marques. As well as 0% financing, goodies include finance deposit contributions and free insurance. Of particular interest, GMAC’s ‘3 and Easy’ finance package for Chevrolet – whereby buyers enjoy an interest-free and fee-free package over a two-year period with three staged payments – has been extended and expanded across a wider range of models until the end of March.
Meanwhile, the past year has been broadly uneventful with regard to the structure of the finance house sector, with the ‘big three’ comprising Black Horse Motor Finance, Capital Bank Motor and GE Capital Woodchester noticeably ahead in terms of agreement volumes and money advanced compared with second tier players such as Carlyle and Close Motor Finance.The most significant corporate move concerned Provident Financial’s closure in mid-December of Yes Car Credit, its used car retailing and sub-prime subsidiary, following an exposure of YCC’s selling methods by the BBC Watchdog programme. The closure cost Provident Financial £141m.Looking ahead, it is difficult to see the parents of motor finance groups tolerating the low margins which characterise the business for much longer – the more so since most have thriving direct lending operations which, perversely, are competing against point-of-sale. Why bother with a dealer middleman when the rewards are so much greater through a direct approach to the borrower?