With the automotive industry under pressure, Owen Edwards and Tim Reid look at how to stay ahead of the regulator.
The automotive sector is facing unprecedented challenges, and increasing regulation is only one. Putting customers first is not easy when dealerships are fighting for survival, but the Financial Conduct Authority’s (FCA) focus on treating customers fairly remains relentless.
By taking some practical steps now, those in the automotive sector can get ahead of the regulatory regime and back to managing the more-immediate challenges, while building long-term shareholder value.
An uncertain outlook
The automotive retail market is going through rapid and wholescale change. The way many of us work and do business has changed significantly in recent months, and perhaps permanently.
Buying habits have echoed this change, with a reduction in the number of customers willing to visit dealerships, while processes for selling vehicles online have advanced. Brexit outcomes are still unclear and the ongoing negotiations with the EU are generating yet greater uncertainty.
Pent-up demand in the automotive retail market is ensuring that both new and used vehicle sales remain buoyant, but whether this will continue into Q4 2020 and Q1 2021 is impossible to say, with a potential recession looming.
Doubts as to what the future holds has focused the minds of operators in the automotive sector on survival, and maximising short-term vehicle sales to meet volume targets.
No regulatory respite
There is, however, one constant in an otherwise-rapidly changing economic climate, and that is the FCA’s focus on consumer protection.
The regulator has been investigating what it sees as questionable selling practices and weak controls in the automotive sector for some time. If anything, its focus on customers has intensified over the past 12 months, as fears over unemployment and the long-term affordability of credit have increased.
Business may not have returned to normal for the sector, and may not do so for some time, but it’s very much ‘business as usual’ for the regulator, as far as customer protection is concerned.
It is no surprise, therefore, to see the FCA asking whether firms are relaxing controls or taking short cuts to increase sales and shore up their balance sheets, and whether customers are receiving fair treatment.
Firms will have to demonstrate that standards are robust and have not been relaxed in this regard. Strong corporate governance, a customer-focused culture and compliance with regulatory requirements at all times will be key. Now is certainly not the time for senior management to be distracted from these goals.
Firm-specific scrutiny on the rise
The FCA’s Senior Managers and Certification Regime (SM&CR) is really starting to bite. Over the past 12 months there have been several interventions in the automotive sector from the FCA.
Some of these have cross-sector impacts, such as the temporary guidance concerning customer payment deferrals for motor finance agreements (the FCA has put measures in place to ensure support is available after 31 October 2020 for those in difficulty) the proposed ban on discretionary commission models and the continuing regulatory focus on motor finance sales processes.
Others have been directed at specific firms, such as the widely publicised FCA investigation of car dealership Lookers and the rafts of information the FCA has been requesting from other firms we work with. These requests range from financial data, to assess firms’ ongoing viability, to specific conduct issues that may have been identified through regulatory returns, audit reports, mystery shopping exercises or whistleblowing disclosures.
We're seeing much more of these firm-specific challenges and expect the FCA to continue to work its way through all major dealerships in the coming months. One illustration of this is the fact that some FCA Skilled Person appointments that have been deferred during the pandemic are now coming back on stream.
Those firms that can most-readily demonstrate that they are meeting the FCA’s expectations will be the ones that receive what the FCA has often referred to as 'the regulatory dividend' – essentially the freedom to focus on running their businesses without being subject to close supervision. But those that have yet to earn the FCA’s trust can look forward to a period of increased scrutiny, challenge and potentially costly interventions that will distract management and act as a drag on the business.
The choice, for management, is whether to get on the front foot or risk losing control of business priorities when the regulator comes knocking.
Get started with a healthcheck
A little time and focus now could prevent some major remediation work further down the line. With this in mind, we have developed a healthcheck for automotive dealerships.
The healthcheck comprises a short, high-level, diagnostic review to assess your governance, compliance and sales arrangements. It is designed to identify your firm’s strengths and weaknesses in these areas and to benchmark you against competitors and FCA expectations.
We can also provide clear guidance on the steps you need to take to strengthen your processes and, using our experience and judgement, a clear indication of priorities.