Is the new agency model a game-changer for retailers?

The new agency model heralds a significant change to the way in which new vehicles are sold – it bears the moniker of commercial disruptor with some justification. But it is a legal disruptor as well which is understandably causing anxiety in some quarters.

A genuine agency model for the sale of new cars implies the manufacturer owning the car, setting the price and discounts, bearing the appropriate share of overheads and bearing the risks. In turn, the retailer negotiates the sale to the customer on behalf of the manufacturer and in return receives a commission or handling fee from the manufacturer. The customer concludes the transaction with the manufacturer directly.

An early assessment therefore has to be made whether what the OEM is pushing is a genuine, pure agency model and what the scope of the model is – because in parallel, various partial/non-genuine agency models are being proposed in the UK by a number of manufacturers with different structures. Alongside, there is a discussion to be had about whether the traditional three-tier model for used car sales, aftersales and part-exchanges is going to be maintained, because it may be only a question of time before the agency model is adapted for those types of sales as well.

How then does genuine agency impact on retailers legally? If the model is pure agency, the retailer’s role shifts from getting the best price to matching the best vehicle to the customer’s wants and needs; the retailer becomes less salesman and more matchmaker.

But if the model is, indeed, genuine agency, the retailer then finds itself in a slightly invidious position. It needs sales to generate commission – nothing changes there – but it is not primarily the seller. Instead, its function is to drive sales to the OEM’s online portal where the customer’s buying decision is made and the transaction is concluded. The retailer therefore becomes a touchpoint for product information at the front end, and the provider of the handover experience at the back end.

Commercially, there is much to be said for pure agency in terms of a retailer seeing increased benefits in reduced costs. But a very careful legal and logistical analysis must be undertaken when it comes to risk and reward with the new model. As someone has put it, retailers need to avoid being the architects of their own incineration.

Consider, for example the Consumer Rights Act (CRA). If a retailer under a true agency model should not be bearing any risk from the sale, then consumer rights and remedies will necessarily be against the manufacturer. But there are a number of legal implications of this.

What is the scope and limits of authority by dealer employees in terms of their pre-sale discussions with customers? Are there areas of information that a customer might want to know which a retailer does not know or is not authorised to discuss? What if a vehicle is misdescribed or misrepresented? How will the manufacturer effectively police a retailer’s workforce at pains of being bound by what they might say or do?

At present, claims also typically involve three parties: the consumer, retailer and the finance company. Under the new agency model, a claim could involve four parties, with consumers left to grapple with who is responsible for what. Will manufacturers start bringing claims for indemnities or triggering complicated commission clawback clauses in the agency agreements? That is a very complex area indeed.

Civil remedies

There is also the question of civil remedies under the CRA, which stipulates that if goods, here the vehicle, is faulty after the first 30 days, the trader be given an opportunity to repair or replace it before a consumer’s final right to reject arises. But under an agency model, the trader would be the manufacturer. How then does an OEM address that? Will the retailer have the right to accept a consumer’s rejection of a given vehicle? If so or if not, how will the OEM interface with the retailer, and how good will the OEMs be at this?

Will retailers be expected to bear the costs of dealing with complaints if they are authorised to do so, or what is doing so worth to the OEM in terms of what it might pay the retailers? Do the OEMs have any idea what they are potentially taking on?

Consumer credit is another interesting consideration. If the retailer has to push the customer to the OEM’s captive finance provider, what happens if the customer is rejected for finance purposes? Can the retailer suggest an alternative funder? Under the pure agency model, it would seem not. What does a retailer do then? Does it offer a used-car instead, or must it show the customer the door?

Moreover, in consumer credit cases, since more than 80% of the car might be on finance, if there is a complaint, isn’t there a risk of unwinding a credit agreement? How does that sit and square with the new Consumer Duty Regulation coming in next year and FCA authorisation?

What about part-exchanges? Under a pure agency, the sale to the dealer would not be a linked transaction because the purchase of the new car is with the OEM. How will this therefore be managed? In an environment where good business is shifting units, do OEMs currently really want used cars back? What are they going to do with them?

Will an agency model be caught by the Commercial Agents Regulations, a liability that OEMs don’t currently have? I haven’t yet settled on a view on this, but a lot will depend on what authority, if any, a retailer will have to negotiate any aspect of the transaction.

We must think, too, about the agency model opening up other areas of statutory and regulatory liability for OEMs – including the potential of criminal sanctions for unfair practices under the Consumer Protection from Unfair Trading Regulations? Are the OEMs seriously going to subject themselves to prosecution for misleading actions or misleading omissions, enforcement orders, compliance notices, unlimited fines, director disqualification or imprisonment? How therefore are the risks going to be allocated here?

What if legislative requirements conflict with what a principal requires an agent to do? Against who, OEM or agent, are proceedings likely to be brought? I am not convinced that all of these types of issues have been properly and thoroughly considered – even if they have been considered at all.

Consumer perception

Overarching all of this is consumer perception. The courts are often clogged with claims issued against the wrong contracting party. Cases involving hire-purchase are classic examples, issued against retailers instead of the finance houses, and then having to be subsequently amended.

Since the customer’s contact, interaction, the process and their experience are all bound up in the dealership, some might still think they are contracting with the dealership. Under the new agency model, a dealership will have no primary contractual liability to consumers at all for new car purchases. However, what about mixed sites for new and used?

Customers will have no claims against the dealer for new, but will still have rights against the dealer for used. In other words, there will be sites which are part pure agency for new cars and part traditional sales model for used.

Optically then, what will the OEMs do to ensure consumers know against whom their legal rights lie? The risk is that for all the hard work the CTSI and the CRA have done to try and clarify consumer rights, the agency model might have the effect of setting that back.

What therefore can we make of the new model? For sure, retailers are going to have to increasingly prove their relevance in an environment where, over time, some OEMs won’t see value in them at all.

Certainly, for retailers not currently enjoying the best of relationships with their OEMs, a shift to the new agency model spells potential trouble.

In the first instance, key is going to be how retailers negotiate their contract with the OEMs – and that is an issue all of its own. What bargaining strength do retailers in reality have to ensure they get an agreement which fairly allocates risk and duties? Some OEMs are engaging in real consultative processes and taking their retailer network with them. Others are being more ruthless.

If implemented well and properly thought through, while there will be less control and potentially less profit, there will also be less risk and less overhead. Retailers will adjust – they always do. An enhanced reputation with consumers will also serve them well in negotiations.

In summary, there is much opportunity for collaboration and an improved consumer experience. But retailers need to think through these issues very seriously, always read the small print, and speak to a decent lawyer.

Article originally published in Auto Retail Network and shared with their kind permission.

For more information, please contact our Automotive team.

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