Understanding the ASIC Regulation Impact Statement CP279

11 August 2017

Finance and Insurance income has been one of the major contributors to dealer profitability in recent times. We’ve seen its advent and rise to become one of the key levers of dealer profitability. To give a perspective on the size of the vehicle finance market in Australia, approximately 90% of all vehicles sold in Australia are arranged through some sort of vehicle finance, and 39% of these sales are arranged through dealership finance1.


This aspect of the motor dealership has recently come under regulatory scrutiny and the regulators have proposed changes to the way dealership finance operates. The recent CP 279: Regulation Impact Statement published by ASIC1 is a result of a comprehensive study, of the impact of proposed regulatory changes to the flex commission arrangements in the car finance market.

Using our Deloitte eProfitFocus database we’ve analysed the possible impact the new regulations could have on the dealer profitability. The dealer profitability for Australia has seen stress in recent months, and Q3 2016 saw the industry record one of the lowest quarterly profits in the last 5 years2. In 2016 we saw approximately 25% of the Australian motor dealers turn loss making up from 19% in 2015.

The strongly competitive nature of the Australian Motor Industry has recently put pressure on the new vehicle department, and the net profit contribution from this department has reduced over a period of time as seen from the chart below.

While the industry is showing signs of self-regulation through a reduced reliance on F&I income, the F&I income still contributes a major portion of the dealer profitability as seen in the chart above.

We have used the recent CP 279: Regulation Impact Statement published by ASIC1 to explore the impact of proposed changes on finance income and have based our calculations on the example3 used by them to model the potential impact on dealer profitability.

If we follow the example used by ASIC, with the new regulation the Australian motor dealer industry:

1. May lose a maximum of approximately, 45% - 57% of the F&I Income.
2. At the maximum loss potential of F&I income, approximately 39% of the dealerships may
turn loss making from the current 25%, if we keep all other variables constant.

The impact will not be the same for all states though, states like Western Australia and Queensland may feel the impact more than their counterparts as seen in the figures below.

In NP%S terms the impact for average Australian dealers maybe as shown in the table below. As seen in the table below based on the current performance levels, states like Victoria and WA may feel the impact more on the average dealer NP%S than others.

While these figures very much represent a “worst-case” scenario it is clear that the Industry needs to be ready to counter the effects of the regulation change. And, while there are multiple remedies that the industry can use to mitigate the effects of this regulation change, in this paper we will explore levers readily available to a dealership:

1. Increase F&I Penetration
2. Rationalise F&I head count

While there is a positive correlation between head count and F&I income, we’ve noticed that the current F&I resources in an average dealership are underutilised, and before adding cost to their operations dealerships need to improve productivity. There is a potential across all segments in the Australian automotive market to increase F&I department productivity as seen from the table below

If the average dealerships increase productivity and match the Top 30% dealers in their respective segments, the finance penetration has a potential to increase from the current 33% for average dealers to 35%, just 1% shy of the industry leaders.

But when we study our eProfitFocus data further, we see that, even the Industry leaders have potential to increase F&I penetration.

As seen in the figure 4 there is certainly potential for increasing the finance penetration. The current industry penetration levels has a potential to yield positive returns up to 55% penetration levels. This is dynamic as the industry matures and the finance penetration levels increase this ceiling of positive yield may increase even further.

If the Australian Industry achieves an average finance penetration of 55% while keeping all the other variables same, the potential 39% loss making dealers reduce to 27%, which is a significant reduction in the potential loss making dealer population.

Once again the potential increase required in finance penetration is not the same across all states, and some states have a lot of work to do compared to others as is evident from the figure below.

 

As we saw earlier, matching the benchmark productivity could increase finance penetration to 35%, while the sweet spot of finance penetration for Australian motor industry is potentially at 55%. Once the dealers have exhausted the option of increasing productivity, they may look at retaining or increasing the headcount in the F&I dept. to potentially increase the Finance penetration.

From our data it becomes clear that the industry needs to proactively manage change. While the regulatory changes may impact the dealers in short term, the Industry and the dealerships will also benefit from increased finance penetration. As such these changes call for a holistic response from the OEMs and their dealers.

Potential benefits of this change may include:
1. Increase in number of consumers wanting to buy credit through dealerships
2. Potential increase in number of contracts and volume bonuses
3. Streamlined and customer oriented sales process
4. Increased client contact and potential increase in customer satisfaction
5. Potential decrease in cost base as a result of increase in productivity


To manage the impacts from the proposed regulatory changes the industry can do the following:

Dealerships:

1. Increase Finance department productivity
2. Increase Finance penetration
3. Increase income per contract
4. Protect the gross on new and used vehicles
5. Increase productivity across departments and
6. Manage the semi fixed expenses.

OEMs:

While OEMs may not be directly impacted they may need to be aware of the changes in the market place and ensure a smooth sales experience for their consumers to protect their market share

1. Ensure the sales process and number of handoffs are optimum
2. Monitor the profitability of the network
3. Monitor the new vehicle stock in the network


We recommend that at a minimum you should analyze and quantify the impact of this change on your dealership or network. If you wish to access the F&I regulatory impact for a particular brand / state segment grouping and understand how you can gain more from our benchmarking and analytical capabilities we would be pleased to discuss the results of our analysis with you.

 

Authors:
Balram Dabhade and Dorian Lapthorne

 

 

References:

1 Attachment 2 to CP 279: Regulation Impact Statement, ASIC, 3rd March 2017

2 https://www.eprofitfocus.com/market-intelligence/motor-industry-update/what-caused-the-quarter-3-2016-reduction-in-profitability

3 Example Table1: Difference between base rate and contract rate on consumer loan of $45,300, Attachment 2 to CP 279:

 

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