IN YOUR CORNER
Conflict of interest: Who really gets a rev
You have to question the integrity of car finance deals that have an eye on a prize offered by a bank
I have for a long time advised car buyers to source their own finance to make sure they are getting the best deal – lowest interest rate, mainly – rather than the deal that works best for the dealership.
That’s because many financially naive consumers, especially first-time car buyers, are relieved to have someone do the schlep work for them, trusting the F&I to find them the best deal when the wheels could have cost them far less over the term – mostly six years – if they’d been looking after their own interests.
Recently I received this e-mail:
“I am a F&I. I arrange finance for customers of one of the dealership biggest brands in South Africa.
“We are forced to use a specific bank as they have a joint venture with them, but unless we get to a certain percentage in terms of penetration and a certain rate we are penalised on our commission.
“If we get to those requirements, all the dealer principals and their spouses get a sponsored trip overseas. Surely that is a ‘backhand’ to ensure this specific bank gets the monopoly of the business?
“Not only do the DPs and their wives win this trip, but a lot of the regionals who demand the rate and percentage penetration go as well, along with their spouses.
“How is this treating the customer fairly? Charging the customer a higher rate than what they may qualify for.”
My eyes were on stalks by the time I’d read through that, as you can imagine. I’d never heard of such elaborate incentives for car finance deals.
Compliance risk management company Associated Compliance had a lot to say about ethics in a guideline it published for dealership F&Is.
“Probably the most common conflict arises when vehicle distributors offer ‘vouchers’ for every extended warranty sold …
“As compliance officers, we have identified circumstances where an F&I has been able to buy groceries for the entire family every month with vouchers supplied by the distributors.
“It should be completely forbidden by the dealership for any person, or even the dealership itself, to receive any form of reward or compensation other than what is allowable in terms of the regulation – which, in respect of insurance products, is a capped commission rate.”
As far as I can tell, sourcing car finance for a customer is not considered financial advice in the way acting as an intermediary for insurance products is.
Insurance intermediaries are regulated by the FAIS Act, which states that such incentives may be considered unacceptable because they could be viewed as a potential conflict of interest.
But the F&I deals with both vehicle finance and add-on insurance products.
It does make you question the integrity of finance deals struck between a customer and a dealership with an eye on a prize offered by a particular bank.
I spoke to several banks about the F&I’s claims. I specifically asked if the incentives were linked to the interest rate.
Their responses were very carefully worded.
WesBank does run incentive programmes with some of our dealer partners. The reward could be an overseas vacation, amongst other prizes, but none includes a prize winner’s spouse or partner.
Each incentive scheme is different and based on its own individual criteria. The performance criteria usually include the number of quality deals submitted for and converted by the dealership in a specified area.
What are quality deals?
“Deals that have been approved based on internal measurement criteria.”
Standard Bank does partake in various incentive programmes, some of which include overseas trips for participating dealerships. Any such incentives are voluntary. The incentives are based on various parameters depending on what the bank intends achieving from such an incentive, typically, business growth, customer retention or market share growth over a defined period.
Contrary to the claims made as to how incentives work, interest rates do not form part of Standard Bank’s incentive strategy or parameters as this aspect of our business remains consistent in line with our risk origination strategy.
Participating dealers are not incentivised to up-sell the bank’s risk-rated price but rather on support for stated planned outcomes of the incentive.
– Cyril Zhungu, head of automotive retail at Standard Bank.
Absa Vehicle and Asset Finance launched the Golden Partner programme to recognise relationships and support the dealer market.
Dealers register voluntarily and compete against each other in specific categories. The parameters are: production, units and pricing policy adherence.
Only the DPs and spouse of the winning dealerships are invited to go on the trip.
The pricing model does not accommodate any increase in margin to price for Golden Partner transactions. We do not charge a higher rate to accommodate the Golden Partner Programme.
The programme measures the ability of the dealership to meet the pricing model that prices the customer based on their risk profile and the commission paid to the F&I.
We do not have any agreements in place with any dealer where the F&I is penalised if targets are not met.
Bottom line: where there is an incentive, there is a potential conflict of interest.
Don’t assume your needs as a customer are going to triumph those of the dealership with targets linked to prizes.
Approach the car financing banks yourself to see which will offer you the lowest interest rate, but as banking services ombud Reana Steyn warns, don’t apply to more than three banks, because too many applications will negatively affect your credit score.