If you’ve bought a car from a dealership in recent years you would have no doubt been given the option to purchase it using finance and probably would have been sold the odd insurance add-on product too. Both finance and insurance (F&I as it’s known in the trade) give dealers additional income on top of any profit they make from the vehicle through commission paid by lenders, brokers and insurers. So dealers have quite a significant incentive to sell F&I to their customers.
But in recent years the financial regulator (Financial Conduct Authority or FCA) has strengthened its rules relating to F&I and this means there are certain obligations that dealers must meet when they sell these products to you.
What should you expect from dealers?
Unsurprisingly dealers should be aiming to sell you a product that is suited to your needs. Product suitability is key to ensuring you experience a good customer outcome. If this doesn’t happen and the dealer attempts to force the sale of a finance or insurance product then they are not adhering to the FCA’s conduct rules and its principles. What does best practice look like?
- Plenty of questions asked – the salesperson should ask how you will be using the car, your budget, if you want to own it, lease it or want options to do both and what sort of protection you need if something goes wrong. In fact the whole process from start to finish should be driven by the customer rather than being led by the salesperson. The ultimate aim is to ensure that your needs are satisfied and you have received all the appropriate information required for you to make an informed decision.
- Finance/insurance product features – you should be told how the product works, what its main features are and (for finance products) what happens at the end of the agreement e.g. any transfer of vehicle ownership/fees to pay/options available etc. This includes you being made aware of the legal rights each product provides and the processes involved – such as settling the agreement early, withdrawing from it and terminating the agreement.
- Worked financial examples – cost is clearly a big factor and different finance products can lead to very different monthly payments. Unless you are clear what type of finance product you want to use from the outset you should be given some worked examples showing the difference between those in contention to help you understand how affordable they are and decide which to go for.
- Income and expenditure – be prepared to provide information regarding your monthly incomings and outgoings if you take out finance – especially if you have a relatively low credit score. After all a car is usually the second most expensive item you will buy in your lifetime and possibly the first if you only ever rent a property. Lenders can now make use of a wide range of electronic information to determine if you can afford the vehicle, which means a manual I&E check may not be required. But ultimately if you are asked then this means the dealer/lender is having a duty of care for you e.g. making sure the car does not leave you in unsustainable levels of debt and unable to repay. It is an area the FCA has introduced more stringent rules on in recent years.
- Pre-contractual information explained – it is a legal requirement for standard information to be explained to you covering the finance or insurance product. You should be provided with an information sheet that summarises the contract or policy you are entering into.
- Timing – the dealer should ensure that the above information is ordered appropriately and provided clearly and ‘in good time’. You should be given the opportunity to ask any questions you may have and time to consider your options before you take the agreement forward – rather than being pressured to make a decision.
- Specific GAP insurance requirements – In 2015 the FCA implemented rules relating to the sale of Guaranteed Asset Protection (GAP) insurance products. The rules require dealers to provide prescribed information about the GAP policy to you initially and for there to be 2 clear days between the provision of this information and the conclusion of the GAP agreement (when you sign it). The mandated delay in setting up the policy was designed to give customer’s time to look at competing products (such as policies sold online). The FCA’s investigation established that many policies sold by dealerships offered poor value compared to online equivalents which are often much cheaper for the same level of cover.
Regardless of whether you are buying from a small or multi-franchised dealership the above elements should be in place as part of the sale process. The FCA expect all firms they authorise to exhibit high standards by assessing the customer’s needs and providing them with clear, relevant information. The above will only become more important from July this year when the FCA introduces its new Consumer Duty which we blogged about recently here.
Commission and disclosure
In January 2021 new rules were implemented by the FCA that require dealers and other brokers to disclose the existence and nature of commission relating to a finance agreement. The rules are fairly similar for insurance products.
Although the dealer isn’t required to set out the amount of commission they must notify you if a commission has been received and how any commission is structured/provided ‘in good time’ e.g. as part of the sales journey before you set up the agreement or policy. However, if you do want to know the amount of finance commission the dealer receives you are within your rights to request this and if you do it must be provided – this is specified in the FCA’s rules and has been for many years.
Although many customers would not necessarily make a decision about the car/finance/insurance product they go for based on how much commission the dealer is earning it is deemed to be important for providing transparency to customers. Lack of transparency in the past was closely connected with the mis-sale of various financial products – the biggest being Payment Protection Insurance.
The FCA will continue to push firms to improve their standards. But it is important that consumers understand what the process should look like also and hold firms to account.