Do you know everything that goes on in your F&I office? Are you familiar with the consequence when F&I Managers to do not follow critical guidelines when dealing with customers? The responsibilities that come with the role of Dealer Principal also imply being personally liable for “malpractices” in your F&I office, especially the risk of massive fines and possible jail terms when F&I operators break or ignore the rules. In this case, ignorance, on your part or those of the Business Managers can really hurt you and your business. So what precautions can you take to safe-guard your business, your employees, and yourself ? What must you know to protect yourself and your business? This article highlights the key regulatory requirements from various government agencies, and explains the principles behind these guidelines.
The Financial services industry
The rules governing the Financial Services Industry are broadly demarcated by three sectors:
- Guidelines– These are the general rules or principles about what is or isn’t allowed, and why
- Procedures– These are established or official ways of doing something designed to help you stay within the boundaries of the law
- Legislation – These are the laws governing the practices within the Financial Services Industry
Currently, there are more than a dozen Acts, Codes, Guidelines and Regulations that affect the sale of Finance & Insurance in a dealership. The Business Manager that handles customers should have adequate and up-to-date training on what these are so as to operate within the guidelines.
Do you know the Penalties?
As a Dealer Principal, your obligations are covered by a wide range of legislation among which these are the more critical:
- NCCP – National Consumer Credit Protection Act
- Privacy Act
- AML/CTF (Anti-Money Laundering and Counter-Terrorism Financing Act 2006)
- PPS -Personal Property Securities Register
- FSRA– The Financial Services Reform Act
Knowing these, and how they can affect your dealership, is your first duty as Dealer Principal. It will also help you stay in control of your F&I operations to prevent legal actions by eliminating or arresting bad practices. The main consideration arising out of this legislation is outlined in the following:
National Consumer Credit Protection Act (NCCP)
The NCCP covers credit protection for personal, household or domestic, and residential investment purposes. The Act serves to introduce the concept of “responsible lending” to those who sell F&I to their customers, and the subsequent civil and criminal penalties when there are breaches. Dealer Principals should leverage on technology to help monitor the activities of their Credit Representatives within the dealership. These systems, like Op2ma’s Finance Accelerator, should be capable of doing the following effectively and efficiently:
- Aggregate and monitor operational processes to identify issues.
- Combine in-office audits with frequent observations of the behaviour and activities of Business Managers or your F&I operations.
- Include a standard set of procedures and policies for Business Managers, and ensuring that they adhere to them.
The failure to meet NCCP guidelines could lead to hefty compensation for the customer, avoidance of contracts, and enforceable undertakings such as:
- Fines of up to A$220,000 for individuals and A$1,000,000 for companies with up to two years imprisonment for accountable staff.
- Civil penalties of up to $500,000 for each breach.
Anyone who aids or abets an offence, whether directly or indirectly, can also be fined.
Serious breaches also put the Financiers’ credit licence at risk.
If the Credit Provider is held liable for damages relating to a warranty, customers can seek compensation from the supplier and/or a penalty can be imposed.
Misleading or deceiving a customer can attract up to A$1,100,000 in fines for the company.
The Privacy Act essentially serves to protect the privacy of consumers, and covers all areas of information relating to people and what is done with information about them. It is put in place to ensure that businesses do not abuse or misuse the personal information of their customers gathered in the course of a transaction.
Essentially, the underlining principle is that when you collect information from your customers, you are ultimately responsible for the following:
- How the information is collected
- What information is collected
- How the information is used
- How and where the information is stored
- Who has access to the information?
- And how personal information is corrected and updated?
Fines relating to breach of the Privacy Act vary depending on the severity and number of breaches. These can be up to A$220,000 for individuals and A$1,000,000 for companies.
Unsigned Privacy consent forms can attract up to a A$50,000 fine for each instance with no maximum penalty.
Anti-Money laundering and Counter-terrorism Financing Act 2006 (AMl/CtF)
This act was put in place to prevent the proceeds of crime and other illegal activity from entering or being passed through the Australian financial system.
It is designed to identify, mitigate and manage money laundering and terrorism financing risk by detailing the requirements for customer identification.The AML/CTF Act imposes a number of obligations on reporting entities when they provide designated services:
- Customer identification and the verification of identity
- Establishing and maintaining an AML/CTF program
- Ongoing due diligence and reporting (suspicious matters, threshold transactions and international funds transfer instructions)
Due to the possible international effect of these laws, there are both civil and criminal penalties for all involved. Criminal offences include imprisonment for up to 10 years and fines of up to A$1,100,000. Civil penalties can be up to A$2,200,000 for individuals and A$11,000,000 for Companies. Personal Property securities Register (PPs)The legislation that established PPS reform is the Personal Property Securities Act 2009. The PPS Register is administered by the PPS Registrar, whose office is within the Insolvency and Trustee Service Australia (ITSA). The Register is the central part of PPS
reform. A search on the PPS Register will enable a consumer to find out whether there is a security interest registered against personal property that is over A$5,000 including boats, cars, artwork, collectables, etc…the Financial services Reform Act (FsRA)
The Financial Services Reform Act (FSRA)
is a Federal legislation introduced to bring various financial services and products under one licensing regime. It introduces a new disclosure regime for most financial products and establishes a standard of conduct for financial service providers. The key objective is to increase the level of compliance and competency in the financial service industry.
The FSRA covers issues such as pressuring customers to buy insurance, maximising commissions to the Dealerships, and providing a standard dispute resolution process. The risk of a breach comes about when a Business Manager offers advice to a customer on products they should buy, or when they choose not to offer products to customers because the commission is too little. These breaches carry heavy penalties that you must be aware of as Dealer Principal.
Individuals can be fined from A$5,500 to A$22,000, and serve up to 2 years in jail. Companies can be fined from A$110,000 to A$1,000,000.
The extensive knowledge needed to be compliant with all legislation relating to a dealership can be overwhelming for a Dealer Principal, but not knowing it inevitably increases the risk of breaches that can lead to hassles, fines and jail terms for the Dealer Principal. While installing F&I Managers that are trained and trustworthy reduces the risk, having a goodhandle on what goes on daily within your F&I office begins with knowing what to lookout for and how to manage it, minimising your exposure to lawsuits and penalties.