Unravelling Unfair Practices: A Call for Transparency and Consumer Freedom in Motor Finance.

“Sorry, Company Policy says we don’t invoice third-parties”.

“Sorry, Company Policy says we don’t accept payments from third-parties”.

“Sorry, Company Policy says, if you don’t take finance through us, we will add a fee of ￡500 to the transaction”.

On a daily basis, we've been encountering a troubling trend in the motor finance industry: dealers and manufacturers citing company policies that restrict consumers from invoicing third-party finance providers.?

As someone deeply committed to fair practices, I can't help but voice my concerns about the potential negative impacts on customers and the breach of the newly implemented Consumer Duty.

With the implementation of Consumer Duty on the 31st of July 2023, came Principle 12, “A firm must act to deliver good outcomes for retail customers”. It begs the question: How does refusing to invoice a third-party finance provider align with delivering a good customer outcome?

By implementing such policies, motor finance providers are limiting consumers' ability to explore the best and most affordable finance products available in the market.

The FCA advises consumers to make a complaint to the Motor Dealer, where this practice is happening, so eventually they can be logged with the Financial Ombudsman Service (FOS). However, we've observed instances where consumers are denied this right, stating, "You don’t have a live agreement, so you can’t make a complaint". They refuse to acknowledge, register, and provide a final response to the complaint, preventing the consumer from raising the issue with the FOS. Consequently, the consumer's voice cannot be heard by the Ombudsman.

When enquiring why some motor dealers have implemented these policies, they have responded with:

• 1.?????? We do not enter into tri-party agreements with lenders that haven't undergone a thorough vetting process.
• 2.?????? Working with a third-party finance party creates additional and unacceptable risk for our firm.?
• 3.?????? To avoid the regulatory risks arising from contracting via third party credit brokers with whom we have no detailed relationship, and have not subjected to appropriate due diligence, we will invoice the customer directly. This process ensures that the customer obtains their chosen better outcome with a third party they seek, and it is for that third party funder to arrange such documentation as they consider necessary with the customer.? This does not create any additional burden or impediment on the consumer obtaining their chosen outcome, although it is acknowledged that it might create an additional, albeit marginal, additional documentary burden on the funder.? Should that third party funder be unwilling to undertake this negligible amount of additional work, that is a matter for them and their obligations to their customer.

In response to these statements, my thoughts are as follows:

We are FCA-authorised, as both a broker and lender.? As such, a search of the FCA Register can confirm our status for AML and KYC purposes.? This is the only step they would need to take. There is no regulatory risk for the motor finance provider.? Indeed, the regulatory risk (such as it is) will sit with us the broker and lender.?

The motor finance provider will have no relationship with the broker from a regulatory point of view.? This transaction will take place as a sale, and they will retain title to the vehicle until they receive cleared funds.? There is no regulatory (or indeed any other form of) risk to the motor finance provider.

The structure suggested by the dealer in point 3, will have adverse VAT and cashflow implications for the consumer.? This is a failure of TCF and, almost certainly, the Consumer Duty.

It is untrue to say that the alternative structure will create a marginal additional burden.? It would mean that the customer would need to take title to the vehicle and then enter into a sale and leaseback arrangement.? This carries a raft of issues – including warranty issues and the potential for the number of registered keepers of the vehicle to be increased – which will affect residual value.

The only purchase options the customer will have in this scenario, would be to pay cash (in the current climate, not many people would have circa ￡20-￡30K) or pay on their Credit Card (when an average person’s credit limit is ￡6K or less).

Although a personal loan could be an option, the customer is having to borrow a higher amount in full without a balloon payment option, which in turn increases the monthly repayments for the customer. Potentially making the loan option un-affordable.?

If you paid by cash, credit card or personal loan, you would not be covered by the CCA (Consumer Credit Act (1974)) under section 99 and 100, this is where the consumer is entitled to voluntarily terminate the Hire Purchase (HP) or Personal Contract Purchase (PCP) agreement early, and you are ultimately liable for paying 50% of the total value of the purchase.?

Looking back on this policy, is this really Treating the Customer Fairly?

One of the FCA’s objectives is to promote competition, there are a number of questions of how these practices are promoting competition.

The key thing to remember here, is there is now an obligation defined in PRIN 2A.9.17 for any authorised firms within the distribution chain to report to the regulator, other firms in the same chain that are not complying with Principle 12 and PRIN2A. This means brokers are obligated to report these “sludge practices”.

Consumers deserve the freedom to search and facilitate their own finance without undue restrictions from motor finance providers and manufacturers. As we explore these issues further, it becomes clear that the fundamental question is: Who is truly acting in the retail customer's best interests? This is not just regulatory compliance, but it’s about ethics, fairness and transparency too.

I invite those who share these concerns to join our working group as we strive to promote fairness, transparency, and ethical conduct.? While not all providers engage in these restrictive policies, it's crucial that we collectively work towards a more consumer-centric and competitive landscape.

Let's ensure that the motor finance industry operates in a way that truly serves the needs and interests of the consumers it is meant to benefit.

Sarah Cunningham, Compliance Director at The STAR Asset Finance Group.