The motor retail technology market leader points out that current systems do not normally allow dealers or consumers accessing risk-based pricing to see the actual interest rate that they would pay until an application has been made.
James Tew, CEO at iVendi, said: “We’re in a situation where four of the largest motor finance providers are moving to a risk-based model for some or all of their customers. It is very much the direction in which the market is moving.
“There are obvious advantages for the lender and the consumer. Instead of a one-size-fits-all interest rate, the price paid depends on the perceived risk. In a general sense, it looks like a strong basis for a ‘good outcome’, which is what the FCA wants through Consumer Duty, something that is now well-recognised across the sector after a year of operating under the regulations.”
However, James said, there was no way yet available of easily comparing the actual rates being offered by a panel of lenders for a specific consumer where each is using a risk-based model.
“If you’re a dealer and you have three risk-based lenders on your panel and are trying to work out the best outcome for a consumer, current technology doesn’t provide the tools you need to generate accurate quotes and make a direct comparison. The quotes provided to you will tend to be based on the best available rate without knowing whether the consumer will qualify for it.
“Until an application has been made, you won’t be able to see the rate that each risk-based lender is actually offering, so there’s no accurate information available on which to base a decision. It’s a big hole for everyone concerned in terms of meeting your Consumer Duty commitments.”
James said that the only way to see the actual deal being offered would be to make an application to each of the lenders, which would leave a footprint on the consumer’s credit file, or alternatively introducing some form of pre-approval process.
“Making a number of applications is bad for a credit file, whatever the reason, and could damage the consumer’s credit score, so that’s ultimately a bad solution.
“There is the possibility of introducing a pre-approval process, where the consumer provides sufficient information for the lender to assess the rate that would be paid. However, this is not currently really supported across the industry and is something that would require a lot of groundwork, although we are looking into it.”
A further danger, James said, was that in a situation such as this where it was unclear which choice was best for the consumer some dealers may be tempted simply to pick the lender that offered the best commission.
“In the wake of the current FCA inquiry into Discretionary Commission Arrangements, this is an even worse course of action than in the past. All dealers should be moving towards much greater transparency, and the industry needs to find ways of achieving this under risk-based pricing.”
