FCA decision on car dealer finance clouds the issue for car leasing brokers

FCA decision on car dealer finance clouds the issue for car leasing brokers

Posted by

Martin Brown

November 2019

I have severely conflicting views at the moment.

On the one hand, I’m pleased that the Financial Conduct Authority – the FCA – is clamping down vigorously on questionable selling techniques used by car finance brokers.

These are the people selling finance at car dealerships and online so consumers can buy both new and used cars.

On the other, I feel as if I’m riding in the turbulent dirty air of public opinion, which doesn’t understand the difference between a car finance broker and a car leasing broker. And why would they?

Both offer the same ability to acquire a car for a monthly payment.

But with one method, the FCA estimates that without the changes it proposes to protect consumers, it will cost car buyers as much as £165m a year in increased interest charges.

And that’s the point of the FCA’s investigation into car finance brokers.

Unscrupulous brokers were using the increasing differences in charges and the ability to scale commission on finance to ensure the consumer ended up getting what was best for the broker, rather than what was best for the consumer.

Now, I do understand that many car finance brokers had already cleaned up their act and have made huge strides to ensure transparency in the finance process.

But…that’s not all car finance brokers. And now there will eventually be regulation to control such behaviour.

How car leasing brokers differ

Car leasing brokers, on the other hand, have no control over the interest rate charged. That is set by the funders underwriting the vehicle and is usually very low to ensure competitiveness.

Yes, of course, there is a commission paid. And the amount of commission we take from each deal can be varied – that is at our discretion depending on our marketing strategy for the lease deal.

And if they wish to know, we’re also happy to share that commission amount with the consumer.

Indeed, thanks to the FCA’s insistence on ‘Treating Customers Fairly’ (TCF), transparency of process has become central to the car leasing broker sales process.

Before a personal contract hire (PCH) agreement commences, customers are asked if they understand what leasing is (a form of rental) and that they will never own the car (unlike car purchase).

The sales consultant will then talk to the customer about the choice of vehicle, suggest other possible cars that might be suitable, and include questions about maintaining the vehicle during the rental period.

However, ensuring consumers can afford a vehicle doesn’t stop there. The car leasing broker will consider the consumer’s ability to pay for their chosen vehicle before it is put forward to the leasing companies for underwriting.

For example, there may not be enough income after all outgoings to pay for the car’s maintenance; or the rentals themselves may be stretching the consumer’s ability to pay. At this stage, the car leasing broker returns to the consumer and potentially negotiates a more affordable vehicle, or has the difficult task of explaining to the consumer they are simply not creditworthy. Tricky, I know, but essential to ensure affordability.

Car leasing more straightforward

However, it’s not just about treating customers fairly; it’s as much about the products car leasing brokers offer.

I believe car leasing remains the most straightforward method of acquiring a new car, as well as then remaining in a new car every two or three years. It means you are always at the forefront of new car design, whether that is safety or technology – such as going green with an electric car.

The barrier to leasing is low – there are no large downpayments required as there is with a Personal Contract Purchase (PCP) plan. Just an initial rental (usually three times the monthly rental) and you’re off driving.

Changing cars is simple, too. At the end of the agreement, you return the car and start the process again.

I wouldn’t like to say the process is frictionless, but it does have a simplicity that contrasts starkly with the complexity of a PCP agreement. (Do I keep the car? If so, how do I refinance it? Do I have enough equity in the car? Should I just hand it back and not have a deposit for a new vehicle? And so on.)

In the end, does all this matter?

Well, yes. I believe it does.

It’s important that the consumer understands the propositions being offered and the different routes to driving a new vehicle. It’s not helped by a national finance media that continues to happily mix up leasing rentals and PCP payments as if they are one and the same thing.

Clarity is required. Clarity over the products being offered. Clarity during the agreement process. Clarity that puts the consumer in control.

Clarity that comes from dealing with a car leasing broker.

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