The Time for Self-regulation Is Now

There are plenty of examples of why the auto finance industry needs to police itself, but little has been done to protect a key revenue source for dealers. One provider says it’s time for that to change.

Regulations are a fact of life for businesses in the automotive industry, and providers of vehicle service contracts and other value-added products are no exception. Fortunately, we still have time to take the initiative and institute our own oversight procedures before government regulators intervene. The alternative could be detrimental to business.

Consider the current availability of Guaranteed Auto Protection (GAP) in the state of New York. GAP, which is a valuable product for many buyers, is no longer offered because of the inability of GAP providers to police themselves. As a result, the state has regulated the industry to the degree that it is no longer profitable for agents and/or dealers to sell GAP products in the state of New York.

This example illustrates how important it is for product providers to operate transparently under clear rules. The need for self-regulation has grown from a whisper to a roar as it has become easier to get into the business and harder to identify the “bad apples.” Customers are offered amazing deals via the Internet, TV ads and telemarketing, but soon realize that if it sounds too good to be true, it probably is.

Benefits of Self-regulation

We are already seeing some states, including California and Oklahoma, take a more aggressive regulatory stance and more are expected to follow. Businesses in an industry tend to get lumped together and a bad experience reflects negatively on everyone. One company’s failure is bad for all because little attention is given to the specifics of the failure.

If we as an industry demonstrated a willingness to acknowledge and address the reasons for these regulatory actions, benefits would be realized by the product providers, their dealer clients and the final customer.

Product providers are best equipped to establish rules and ethical guidelines because we have a comprehensive understanding of the industry, both from customer service and security perspectives. In addition, rather than dwelling on the negative, it is of paramount importance that we focus on building trust with consumers by promoting proper ways to conduct business. These efforts will enhance the reputation of the industry as a whole.

A self-regulating body has the ability to be proactive and address issues before they become larger problems. Without leadership and oversight, the knee-jerk reactions that occasionally occur now are often extreme and inappropriate. It is also economically advantageous to regulate ourselves versus having the government do it.

Furthermore, self-regulation provides security to dealers and customers. They can be confident the provider will be around to live up to its obligations. We must remember that at the end of the day, we’re nothing more than promise keepers. There are no loss leaders in this business and every deal has to stand on its own.

Self-imposed regulations make good business sense when considering our commitments to customers. They would be able to base decisions on factors other than simple price comparisons, such as quality, service and stability. A more comprehensive understanding of the product and the provider behind it would create more confidence in purchasing decisions and improve customer satisfaction.

How to Create Oversight and Standards

To effectively address these issues, I propose that we create an industry association. It would oversee ethics issues and establish minimum requirements for companies to operate in the marketplace. Companies would receive something like a “Good Housekeeping Seal of Approval” to denote their good standing with the association.

The Association of Finance & Insurance Professionals (AFIP), which is the sanctioning body for the F&I trade, could serve as a template for product providers. Its mission is to give a voice to F&I practitioners, protect the interests of all parties and support the companies that serve the F&I function. AFIP has been well received by both the industry and consumers alike and has improved compliance and raised the credibility of the dealership F&I office.

To be recognized by this proposed association, providers must have the appropriate insurance backing and demonstrate proper relationships with insurance companies. A critical question to ask is, “Who holds the money?” Claim reserve money should be held by the insurance company, not the provider. Too often, fly-by-night companies hold all the money and when they go out of business, the insurance company doesn’t have the funds to cover the claim, leaving the customer stranded. Insurers must also have a minimum AM Best rating of A- (Excellent) or better.

Other factors to consider include the length of time a company has been in business and how customer service is handled. Is there a real person answering the phone? Do customers get a prompt response? The service after the sale is the most important part of our business and establishing standards through self-regulation is the most viable way to preserve the integrity and expertise we have built over many years.

I encourage administrators, agents and dealers to share your ideas and opinions with me about creating an association and establishing a certification process for the industry. Contact me at (800) 548-1875 or at [email protected].