Fixed-rate financing model makes franchise car dealerships ‘transparent and fair’

The future of the FCA’s ruling on auto financing franchise retailers on discretionary commissions has led to greater transparency, but few dealerships are reporting a noticeable change in revenue as a result.

The trend for automaker finance companies (captives) to offer a fixed commission rate to automotive distribution partners has accelerated since the Financial Conduct Authority (FCA) introduced new rules prohibiting discretionary models early in the year. 2021.

According to the Finance and Leasing Association (FLA), many captives had already switched to a fixed rate, one of the models suggested by the FCA, or had done so before the January 28 deadline, so the changes will not have not been onerous for the majority of franchised dealers.

Adrian Dally, the FLA’s director of auto finance, told AM the rules have had the intended impact, with an emphasis on increased levels of transparency and simplicity.

Road to greater commission

Before the rules were changed, some auto dealerships and auto finance brokers received a commission tied to the interest rate paid by customers, which incentivized them to sell more expensive credits to certain customers.

Dally says: “There has been a very clear move towards simpler and more transparent commission models. The FCA now requires disclosure of the nature of the commission, not just the fact that it exists.

Dally says that while other factors have impacted new car financing volumes, such as semiconductor shortages stifling new car supply, it still accounts for 94% of how new vehicles are financed in the UK.

While new car finance volumes may have fallen 20% in September 2021, its market share has not shrunk but only gained a bigger share since the start of the year.

Dally says: “The FCA changes have had more of an impact on the used car finance side. The shift to fixed-rate or risk-based rate commission models has increased levels of trust with consumers, which, in turn, has led to an increase in used car finance penetration.

Little impact on revenue

Phillip Kerry, sales and marketing manager of BMW Financial Services, said new car finance at BMW and Mini was already working on a fixed rate model and so the only real impact had been to align its car finance with opportunity on what he was already doing on the new side of the car.

He says, “Franchise dealerships have been used to this fixed rate model on new car financing for a few years now.

“We have put enhanced disclosure in our quotes as well as in the T&Cs.

“Consumers have the right to ask questions about this and retailers have processes in place to discuss the commission if the customer wishes. But there was no significant impact sponsored by on revenue or penetration before or after the FCA changes.

Jerry Page, director of compliance and risk at HR Owen, said the process of working with captive finance companies on a fixed rate fee has been “very transparent and fair”.

He says the funding terms and conditions have been updated to clarify the nature of the commission.

So far, no client has requested a commission since the changes came into force.

Dally agrees that, in the market as a whole, there has not been a significant increase reported by client members asking about commission disclosure or discretionary commission models.

HR Owen also did not see a dramatic change in penetration or revenue following the move to a fixed-rate model.

Page said, “What he’s really done is make car financing more transparent, which can only be a good thing.”

Have the FCA rules had an impact?

But if the changes don’t have a huge impact on revenue or penetration, does that mean the commission model rules aren’t having the desired effect?

The FCA has been collecting evidence since September of the impact of rule changes on mystery shopping at outlets.

From now on, the regulator is looking into whether its measures are working as it intended and it estimates it will save consumers around £165m a year.

However, Dally says the £165million figure relates to a period in the market before the rules were in place and financing for new cars, in particular, moved to a fixed rate some years ago. years.

He says: “The FCA was not concerned about the amount of the commission, but they were concerned about the incentives created by the old models and that is what they wanted to prohibit.

“The amount of the commission has never been a problem. At the end of the day, dealerships do a job, and reasonable customers expect them to be paid for it. »

New car financing has not adopted a risk-based pricing model – where lenders can determine interest rates for car financing based on the creditworthiness and risk of the applicant.

Since captive finance companies primarily serve prime customers (those with good credit ratings), it didn’t make financial sense for them to invest in creating systems to deliver this model.

However, captives that fund used car financing may well offer risk-based pricing in the future to serve a wider range of customers with different credit ratings and financial backgrounds.


Personal Contract Hire (PCH) is regulated by the FCA under the Consumer Credit Act (CCA), but the new rules regarding commission disclosure models do not apply to PCH.

Subscription services, which can be personalized forms of personal leasing contracts, have already been launched by brands such as Volvo, which has seen its Care By Volvo offering already account for more than 15% of UK retail sales. from his first year.

Adrian Dally of the FLA says: “Subscriptions, in general, have not been regulated as they tend to cover shorter periods. Contracts of less than 90 days are not regulated. If you get a car subscription and can’t see on the website that they are FCA regulated, chances are it’s unregulated finance.

Whether or not subscriptions fall under the CCA depends. If a subscription offer is not authorized by the FCA, what is presented as a rolling contract may be set up to be a succession of separate contracts which are within the legal limit of less than 90 days each time in order to not be regulated by the FCA.

Dally says: “The FCA will certainly look at PCH and subscriptions as part of its review over the next three years.

“The scope of the CCA is set by Parliament and the limits are set by the Treasury, so it would be a matter for that department, rather than the FCA itself.”

Wagonex facilitates subscriptions for dealer groups and manufacturers and has seen interest increase tenfold over the past 18 months.

With PCH, customers are usually locked into their agreement or face costly early termination fees. Subscriptions are set to be much more flexible, with customers able to trade in and change vehicles from month to month.

Toby Kernon, CEO and Founder of WagonexToby Kernon, chief executive and founder of Wagonex, believes that subscriptions will eventually take the lion’s share of the market from Personal Contract Purchase (PCP).

This is a bold statement as PCP currently accounts for over 90% of the new car finance market.

He says, “Stranger things have happened in other industries. Flexibility is the great appeal of subscriptions.

“The average length of contracts is increasing on a quarterly basis and it is currently north of 12 months. When we launched, it was between a month and three months.

Offering greater flexibility on subscription means vehicles return to the fleet owner, such as dealer networks, to be resold as a nearly new vehicle, much like PCP.

Kernon says the subscription market is still in its infancy because it’s been easier for the industry not to innovate with personal leasing.

He says, “If you lock a client into PCH for three or four years, you don’t have to worry about what that client does. Subscriptions give you regular contact with customers and so it is much more of a service industry.

Kernon welcomed the FCA’s review of subscriptions and Wagonex has already volunteered to help engage with the regulator.

He said, “Subscriptions offer more flexibility and are more customer-centric than PCP ever could be.

“We’ve volunteered to help in any way we can, so hopefully we’ll have an audience with them soon.”

Dally said if the subscription market grows, especially with more electric vehicles (EVs) funded in this way, they should be brought into the scope of the CCA.

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