When does regulation become strangulation?

My colleague Andrew Tongue, our in-house expert on all matters related to regulation, wrote a blog for ICDP members recently on the implications of the UK regulators’ initial thoughts on what rules should apply to agency agreements in the UK.  This is related to Brexit and the need for the Competition and Markets Authority (the CMA) to come up with its own take on the Block Exemption Regulations (BER).  Agency is not actually covered by the BER as, if an agreement truly means that the agent is acting on behalf of the manufacturer without taking any commercial risk, then there is no vertical agreement that might need to be exempted from the competition rules.  This is the so-called ‘genuine agency’ agreement – but in truth this is the only agency agreement, as anything which does not meet the requirements is not agency.  A ‘non-genuine’ agency agreement is not in fact an agency agreement – it is a form of franchise, and subject to the same rules in our opinion.

 This is all relevant insofar as within the EU, the relevant regulation for agency is actually local commercial law, most of which follow the EU Commercial Agent’s Directive.  What the CMA is proposing in the UK occupies the same position relative to regulations covering vertical trading arrangements as the national commercial codes in EU states will, relative to the European BER.  They are perhaps ahead of the game, but their thinking possibly reflects a response to national lobbying that is being mirrored in lobbying at European level, which may result in similar proposals from the European Commission and other national governments.  The UK position therefore has relevance beyond these shores.

 The core issue that the UK regulator is seeking to address is the same one that CECRA have flagged in their recent submissions related to non-genuine agency agreements.  The CMA is proposing restrictions on agency that would isolate the application to solus sites operated by a single registered company.  In practice this would make it unworkable in the UK environment where most dealerships are owned by large multibrand groups, and there are some indications of a growth in multibranding under agency.  The apparent intention of these restrictions is to provide complete transparency on costs and risks related to an agency operation.  CECRA is arguing that some of the proposed ‘non-genuine’ agency agreements leave significant financial and investment risk with the dealer, and that the rationale manufacturers use to justify this – that the prices are not fixed because the dealer can still negotiate deals from his or her commission – is invalid.

 We are convinced that car retailing in future must be omni-channel, and that requires processes to be integrated, data to be shared and pricing to be largely harmonised.  If these pre-requisites are not achieved, the customer experience will fall short of what they experience every day buying much lower value goods and services.  These pre-requisites cannot be achieved in the relatively ‘laissez-faire’ relationship of an arm’s length franchise agreement, which is why we see more manufacturer involvement in retail through standards and systems.  Whether the next stage is to a modified franchise or to agency is probably not that important from a customer perspective – both formats could deliver a reasonably omni-channel experience.  However, we should not pretend that there is some other contractual format out there called ‘non-genuine agency’.

 Of course margin and bonus structures can be adjusted to reflect a reduced level of risk, for example through the centralisation and ownership of stock.  This was common practice when improved new vehicle supply processes were adopted, particularly in the UK, in the late 1990’s and early 2000’s.  The cost and investment transfers can be easily demonstrated on an open book basis.  Intrabrand competition between dealers in a modified franchise system can be modified through the size of the network and the structure of the bonus system – less focus on volume, more on behaviours – and that is entirely within the control of the manufacturer.  They are in the driving seat for many of today’s inefficiencies.

 Agency goes that bit further than a modified franchise, and will in our view force the manufacturers to be more disciplined in a range of areas that affect distribution cost, and therefore available profits.  It will force them to be more disciplined around balancing production with true demand, and it will shine a spotlight more strongly on excessively high facility standards and other brand related requirements, as these costs must be covered by the manufacturer under agency.  We therefore see agency as a further positive step towards a better distribution model if properly implemented, and in this context, the proposals from the UK regulator would act as a block to this positive progress.  Agency must be possible within integrated multibrand investors and in multibrand sites.  Trying to ringfence each agency is not the solution to ensuring a fair and equitable relationship between manufacturers and dealers.