Transparency provides a clear way through commission crisis

Lenders and their intermediaries need to up their game when communicating with customers.

New research into the attitudes of 2,000 motor finance customers reveals that lenders and brokers have a promising, but complex opportunity to regain the initiative in the long-running commission disclosure issue that has overshadowed the industry for the past 18 months.

The comprehensive survey found that customers remain engaged and committed to motor finance products, valuing their utility and planning to use them again.

This ‘Teflon quality’ sets motor finance apart from some other financial products, such as PPI, whose relevance to the lives of customers has been destroyed, according to Mitch Barltrop, senior managing director of FTI Consulting, which conducted the study in partnership with law firm Shoosmiths.

“And that matters because that provides a high degree of reputational resilience through the uncertainty there has been both in the last few years, and importantly, in what’s to come.”

These next few months will be pivotal for the auto finance sector, as it bids to counter the growing perception among customers of a lack of transparency in finance agreements, and seeks to rebuild trust.

While the majority of consumers believe retrospectively that their agreements were fair, said Barltrop, they have nonetheless submitted claims for compensation for mis-selling, and now expect compensation payouts by the end of this year.

The difficulty for lenders is to reconcile these expectations with potential changes to the legal situation, as three lenders and one consumer group pursue appeals against the Financial Conduct Authority’s proposed redress scheme. Lenders caught up in the crisis need to hone their communications strategy, amid the threat that social media and news outlets are drowning out the messages that auto finance companies are trying to convey directly to their customers, warned Barltrop. In a worrying number of instances, misinformation and disinformation have a bigger platform and louder voice than official legal outcomes.

Yet finance companies that do enter the public debate are in danger of tarnishing their brands through association with the mis-selling crisis. Maintaining a low profile and dealing directly with customers is a lower risk approach, said the head of one major financial institution.

“Looking at what we’ve researched around consumer sentiment, apathy, and engagement with terms, there is a commercial commercial opportunity to review the way in which information is provided to customers, from the point of sale to how all the information is given by an intermediary, right the way through the contracting,” he said.

Overcoming consumers’ in-built mistrust of the ‘small print’ through clearer documentation is vital for restoring public faith, said Gibbard. Otherwise, the public will perceive terms and conditions as “something done to you, rather than for you.” Customers still value motor finance, he said, but in many instances no longer trust what they’re being shown, amid confusing pricing, incentives and highly technical documentation.

Shoosmiths presented three different styles of T&Cs to the 2,000 respondents to its research project, and found widely different reactions.

“The level of engagement and trust in a document that uses simplified language and lots of signposting to help navigate is massive. The brand enhancement is massive,” said Gibbard. Pricing has to be explained clearly, and lenders have to speak as if they are on the side of the customer.

This approach does not, however, resolve the complexity of handling the hundreds of thousands of complaints about motor finance commissions submitted by customers and claims management companies (CMCs).

About a quarter of complaints submitted to Northridge Finance have been duplicated across multiple CMCs – one claim is being pursued by 14 different CMCs – creating confusion over which CMC is eligible to take the claim forward.

The lender will also pose the same question to its customers. When the results come back, the lender will present the data to the FCA, illustrating the complexity of just one of the issues it faces in resolving the regulator’s redress scheme.

Stellantis Financial Services is facing the same challenge in identifying which CMC has responsibility for which claim, with more than 80% of the complaints it has received originating with CMCs, said executive director Simon Kington.

 “It’s not fair that as a motor lender I have to sort this mess out,” he said. “It’s an operational cost, and a resource that I have to take away from my normal business.”

He added that Stellantis Financial Services has also been investigating whether CMCs have the legal right to hold clients’ money, and it appears that a significant proportion do not.

The FCA has not yet responded to questions about how lenders should deal with this issue. Consumer Duty places a responsibility on lenders to look after customers’ money, so if they were to pay compensation via a CMC and the money fails to reach the customer there is the potential for a regulatory risk alongside a reputational risk.